Why Is American Airlines (AAL) Down 3.4% Since Last Earnings Report?

It has been about a month since the last earnings report for American Airlines (AAL). Shares have lost about 3.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is American Airlines due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

In-line Earnings at American Airlines in Q4

American Airlines’ earnings (excluding 20 cents from non-recurring items) of $1.15 per share matched the Zacks Consensus Estimate. However, the bottom line improved 10.6% on a year-over-year basis, backed by low fuel costs. Operating revenues of $11,313 million increased 3.4% year over year and also marginally beat the Zacks Consensus Estimate of $11,308.3 million. Higher passenger revenues drove the top line.

Passenger revenues, which accounted for bulk of the top line (91.5%), increased 3.9% owing to strong demand for air travel. But cargo revenues declined 18.3% to $216 million, mainly due to a 15.6% reduction in cargo ton miles. Other revenues increased 5.4%.

Total revenue per available seat miles (TRASM: a key measure of unit revenues) inched up 0.5% to 16.1 cents in the reported quarter. Passenger revenue per available seat miles (PRASM) increased 0.9% to 14.72 cents in the fourth quarter. However, consolidated yield dipped 2%.

While traffic (measured by revenue passenger miles) was up 6%, capacity (measured by average seat miles) expanded 2.9%. Consolidated load factor (percentage of seats filled by passengers) increased 240 basis points to 83.8% as traffic growth outpaced capacity expansion.

Total operating costs (on a reported basis) were up 2.1% year over year to $10,584 million with expenses pertaining to salaries, wages and benefits rising 3%. Consolidated operating costs per available seat miles (CASM: excluding fuel and special items) increased 2% to 11.59 cents. However, CASM (including fuel and special items) declined 0.8%  Average fuel cost per gallon (on a consolidated basis: including taxes) declined 8.7% to $2.05.

American Airlines currently has 24 Boeing 737 MAX jets in its fleet, which are grounded since March 2019. Notably, American Airlines canceled roughly 10,000 flights in the final quarter of 2019. The carrier currently expects its Boeing 737 MAX jets to be grounded through Jun 3, 2020.

American Airlines rewarded its shareholders to the tune of $329 million in the reported quarter through buybacks ($285 million) and dividends ($44 million). Furthermore, the carrier declared a dividend of 10 cents per share. The amount will be paid out on Feb 19, 2020 to the shareholders of record on Feb 5. Notably, the carrier $1.3 billion to its shareholders through dividends and share repurchases in 2019.

Outlook

For the first quarter of 2020, TRASM is expected to be either flat or increase up to 2% on a year-over-year basis. Pre-tax margin excluding special items is projected in the range of 2-4%. Additionally, fuel costs are estimated between $2.00 and $2.05 per gallon in the ongoing quarter. The company predicts first-quarter costs per available seat miles (excluding fuel and special items) to increase in the 2-4% band. Capacity is expected to grow approximately 2.5% in the March-end quarter.

For 2020, capacity is expected to expand in the range of 4-5%. American Airlines expects 2020 earnings per share between $4 and $6. Moreover, the carrier anticipates to generate approximately $6 billion of free cash flow between 2020 and 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month. The consensus estimate has shifted -5.31% due to these changes.

VGM Scores

At this time, American Airlines has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

American Airlines has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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