American Airlines (AAL) had already previewed quite a bit of its second quarter 2019 operational results. Still, and despite a minor earnings beat, investors proceeded to dump shares in after-earnings trading, driven by what I see as a combination of (1) further bottom-line pressure from the extended grounding of Boeing’s (BA) 737 MAX, and (2) a much-needed de-risking of the stock, whose price had risen an impressive 27% since the beginning of June.
Credit: Standby Nordic
Results in line, but fears mount
To be fair, there was not much about American’s results that surprised me. As I had discussed in my earnings preview, the MAX issues seem to have been a key factor driving capacity down, resulting in number of departures that dropped 0.4% year-over-year in the largest mainline segment, and TRASM (total revenue per available seat mile) up. The net impact of slightly lower available seats but higher per-seat sales were passenger revenues of $11.0 billion that increased 3.2%, largely matching expectations.
Also as projected, costs of operation appeared to be mostly in line. Fuel expenses dropped by about 5%, driven by a combination of consumption that grew minimally and crude oil prices that pulled back compared to 2Q18. CASM ex-fuel, a measure of per-seat operating expenses, increased by a 5% rate that looked sub-par compared to the rest of the industry. Yet, the cost pressure had also been anticipated by the management team in its updated guidance.
What probably displeased shareholders the most were the lingering concerns over the grounding of the company’s 24 MAX planes, a move that’s now projected to lower full-year 2019 pre-tax earnings by about $400 million. Should the company follow Southwest Airlines’ (LUV) lead and “cold-stack” the fleet though early January 2020, the financial impact could be even greater. Not even American’s full-year EPS guidance bump, from $4.00 to $4.50 at the low-end of the range, seems to have put investors’ minds at ease.
The “slow bleed” of the shares’ value on earnings day (see below) seems to suggest that investors grew tired of holding on to a stock that can’t seem to shine, even amid a highly favorable sector-wide environment for air carriers.
Source: Yahoo Finance
Not my favorite airline stock
AAL has traditionally traded at a discount to peers, given the company’s bloated cost structure leading to less-than-impressive margins and high debt levels. As the graph below suggests, the valuation discount seems to be widening in the past six months as the market more clearly begins to separate winners from losers in the space.
Despite resilient consumer spending activity, particularly in the U.S., American Airlines still faces a number of challenges, some of which outside its control, that make its stock probably the least compelling to own among the Big 4 U.S.-based airlines. As tends to be the case with other companies that share a similar profile of high operating and financial leverage, AAL is likely to be one of the most volatile names in the sector. While this could be good news for short-term traders, I believe AAL continues to be a stock that long-term investors would be better off avoiding.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.