Airline stocks plunge after American Airlines Lowers Outlook

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January 10, 2019 12:40pm ETF BASIC NEWS

Airline Sector

From Bill Peters: American Airlines (AAL) dimmed its fourth-quarter unit revenue forecast due to a “lower than anticipated improvement” over a strong domestic showing last year, and the carrier slashed its 2018 profit outlook. American Airlines stock and other airline stocks fell hard in morning trading.

The move makes American, with world’s largest airline by traffic, the latest legacy carrier to temper its outlook for the period. Delta Air Lines (DAL) a week ago cut its fourth-quarter unit revenue expectations for the second time within a month. The more pessimistic view from Delta at that time also dragged airline stocks lower.

American Airlines said it expected total unit revenue to be up around 1.5% for the quarter, which is at the low end of an earlier forecast of a 1.5%-3.5% gain.

Unit revenue measures an airline’s sales in relation to its overall available seats and flights. Wall Street tends to like it when airlines can drive sales higher without having to add more of them.

American Airlines also said it expected adjusted earnings per share for 2018 to be $4.40-$4.60, down from an October forecast of $4.50-$5.00 and largely below Wall Street views for $4.57, according to Zacks Investment Research.

Government Shutdown Effect?

The forecast comes as airlines cite strong travel demand in a still-strong economy. But American’s problem is that its prior forecasts has been overly aggressive, rather than any big changes in the pricing structure, Cowen analyst Helane Becker said in a research note.

“We believe a change in messaging is needed at American,” she warned. “The company cannot continue to come out with a bullish message and then underperform all year.”

She added: “We believe once the environment stabilizes American shares should outperform as their domestic buildout in Dallas and Charlotte generates higher revenue and the balance sheet improves.”

And she said first-quarter forecasts from the airlines could be more cautious, as the government shutdown cuts into corporate travel. American, she noted, has a hub at Reagan National Airport, one of the big airports that handles flights to and from Washington, D.C.

American Airlines Stock, Airline Stocks Slammed

In a research note on Thursday, Raymond James analyst Savanthi Syth said that “While we do not think American’s lower revision is an overly negative alarm bell, given the level of uncertainty and concern around demand, investors are likely to shoot first.”

On Thursday, they did. American Airlines stock crashed 9.8% in the stock market today. Among other airline stocks, Delta fell 3.9%.

United Airlines (UAL) fell 6.2%. The drop put United below its 200-day line, a key test of investor support. Still, United has a strong IBD Composite Rating of 94 out of a best-possible 99. United has regained investors’ faith after showing signs that an expansion plan into smaller cities was working. JPMorgan also upgraded the stock to overweight from neutral.

Southwest (LUV) fell 3.4%. JetBlue (JBLU) lost 4%. JPMorgan downgraded JetBlue to neutral from overweight.

Heavy-discount carrier Spirit Airlines (SAVE) lost 3.4%. That stock, however, still has a 99 Composite Rating. It was also a recent IBD Stock of the Day. Spirit Airlines’ stock is also holding onto its 50-day line.

Skies Darkening For Airline Stocks?

Delta last month said it expected a “slight deceleration in global GDP” this year. But the carrier said it was well-equipped to handle any potential downturn.

Investors last year worried that rising fuel costs would dampen profits. Now that oil prices have eased, they’re worried cheaper fuel will lead to heightened competition. While cheaper fuel widens airlines’ profits, it also frees up money to compete and absorb any cuts in ticket prices they need to make to compete with rivals.

American Airlines on Thursday also stuck with its nonfuel adjusted unit cost outlook for the fourth quarter. The company expects a range of down 1% to up 1%.

U.S. Global Jets ETF () was trading at $257.87 per share on Thursday afternoon, down $0.10 (-0.04%). Year-to-date, has declined -2.98%, versus a % rise in the benchmark S&P 500 index during the same period.

This article is brought to you courtesy of Investor’s Business Daily.

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