American Airlines Group Inc. (AAL) shares are taking a dip on Monday, trading down by 1.91% to $12.84. This downward movement comes ahead of the company’s highly anticipated third-quarter earnings report, scheduled for release Thursday before the market opens.
Traders and investors are keenly watching the airline’s performance, particularly as the second quarter presented mixed results. While American Airlines managed to exceed earnings expectations, reporting an adjusted EPS of $1.09 compared to the consensus estimate of $1.05, the overall performance was overshadowed by several key factors.
Firstly, the airline’s total operating revenue growth was a modest 2% year-over-year, falling short of the anticipated $14.36 billion. The company’s profit margins also took a hit, with the adjusted operating margin shrinking to 9.7% from 15.4% in the same period last year. This decline was largely attributed to increased operating expenses, which rose by 8.9% to $12.95 billion.
These challenges led American Airlines to lower its full-year EPS guidance, forecasting a range of $0.70 to $1.30, a significant reduction from its previous outlook of $2.25 to $3.25.
As investors turn their attention to the upcoming third-quarter report, several critical areas will be under scrutiny. The company’s operating margins are a major concern, with American Airlines guiding for an adjusted operating margin of just 2% to 4% in the third quarter. This represents a significant drop from the 9.7% achieved in the previous quarter and further reflects the financial headwinds the company is facing. The airline also expects breakeven adjusted EPS in the third quarter.
While American Airlines has maintained growth in passenger demand, with revenue passenger miles increasing by 8.5% and available seat miles (ASM) growing by 8% in the second quarter, the company faces pressure from weaker pricing power and demand softness. Total revenue per available seat mile (TRASM) declined by 5.6% in the second quarter and is expected to fall further by 2.5% to 4.5% in the third quarter.
Rising fuel costs remain a significant concern. The average aircraft fuel price increased by 3.3% year-over-year in the second quarter to $2.70 per gallon, further squeezing profitability. Operating costs per ASM also rose by 0.8%, and American expects this metric, excluding fuel and special items, to increase by another 1% to 3% in the third quarter.
Despite these challenges, American Airlines has made progress in reducing its debt load. The airline reduced its total debt by nearly $680 million in the second quarter, moving closer to its goal of cutting $15 billion in debt by the end of 2025. As of the end of the second quarter, American had $11.7 billion in total liquidity, offering some cushion as it navigates the current challenging operating environment.
Investors will also be considering American Airlines’ dividend and potential buyback programs when evaluating the company’s stock. The airline currently pays a dividend, yielding 1.22% per year. Buyback programs, which can provide support for share prices, are also a factor.
As American Airlines prepares for its third-quarter earnings report, investors will be closely watching the company’s financial performance, operational metrics, and progress on debt reduction. The company’s dividend and potential buyback programs could also play a role in influencing investor sentiment.