American Airlines Shares Plunge After Cutting Profit Outlook on Weak Fares

(Bloomberg) -- American Airlines Group Inc. tumbled and pulled other carriers in its wake after saying 2018 earnings were set to fall short of its forecast because of disappointing domestic fares.

The update Thursday compounded a darkening outlook for U.S. airlines as economic uncertainty threatens demand. Delta Air Lines Inc. recently trimmed its forecast for a key gauge of pricing power and set the stage for a gloomy earnings season, which kicks off next week for the major carriers.

American pared its expectation for the same measure as well, saying fourth-quarter revenue from each seat flown a mile increased just 1.5 percent. That was the low end of the previous outlook, in which the world’s largest airline had said the gains would be as high as 3.5 percent.

“Revenue momentum is really the key metric in this industry,” said Jack Atkins, an analyst at Stephens Inc. “If folks think revenue momentum is slowing, then their outlook for the stocks dims a bit. It’s just where investor mindset is.”

American dropped 9.1 percent to $30.38 at 10:41 a.m. in New York, leading a Standard & Poor’s index of five major airlines down 4.5 percent. Airlines were the second-worst performing industry group in the S&P 500.

Fuel Costs

Adjusted earnings last year will be $4.40 to $4.60 a share, American said in a regulatory filing. The Fort Worth, Texas-based carrier, which will report full 2018 results later this month, had forecast profit of as much as $5. Analysts had anticipated $4.62.

Low fuel prices are presenting a double-edged sword to airlines. While jet-kerosene costs have been rising since the start of the year, they still remain below where they were a year ago. That keeps expenses in check but also removes an incentive to raise fares. Investors fear that lower fuel costs also will sway carriers to increase capacity, which typically depresses airfares.

Delta last week cited a weaker-than-expected end to the holiday season as expectations for strong business travel failed to materialize.

Government Shutdown

American’s report provides additional evidence that the domestic market is seeing less growth from lucrative corporate passengers than from leisure travelers, said Helane Becker, a Cowen & Co. analyst.

The stalemate in Washington is probably making things worse, she said. That’s a particular concern for American because of its strength at Reagan National Airport in Washington, Becker said. The company has a 25 percent share of passengers at the airport, about 10 percentage points higher than the second-largest carrier there, according to the Department of Transportation.

“The government shutdown will impact the industry’s corporate travel business the longer it lasts,” she said in a note to clients. “We believe government contractors are not traveling during this shutdown, and the longer it goes on, the greater the impact.”

Delta and United Continental Holdings Inc. report results Jan. 15 and are expected to provide information on forward travel bookings.

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