American Drops as Glum Revenue Outlook Echoes United's Woesby
Average fares decline amid competition from discounters
Key gauge won't turn positive until next year, American says
American Airlines Group Inc. warned that a closely watched revenue measure won’t turn positive until next year, adding to the angst of investors already rattled by a similar forecast from United Airlines.
American, the world’s largest carrier, fell 4.5 percent to close at $38.21 Friday in New York, helping to pull down the Bloomberg U.S. Airlines Index 2.4 percent.
Declines in passenger revenue from each seat flown a mile have plagued U.S. carriers for two years amid softer demand abroad and increased capacity and pricing competition from no-frills airlines at home. The skid in the key measure, known as unit revenue, has led some investors to avoid airlines, helping to drive down share prices.
“There was a sense unit-revenue declines would start to moderate here in the second quarter,” said Savanthi Syth, an analyst at Raymond James Financial Inc. After glum comments from American and United, “there is a question that the idea of unit revenue not getting worse is now getting pushed out. I think there’s that disappointment.”
American expects passenger unit revenue to fall 6 percent to 8 percent this quarter from a year earlier, little changed from the 7.5 percent drop in the first three months of the year. United Continental Holdings Inc. estimates a second-quarter decline of 6.5 percent to 8.5 percent for PRASM, as the metric is known. The outlook is more promising at Delta Air Lines Inc., which forecast a drop of 2.5 percent to 4.5 percent.
The pricing environment “will remain challenging throughout 2016,” American President Scott Kirby said on a conference call Friday.
“The market is rightly concerned about getting back to positive PRASM, and we are focused on that as an explicit, internal goal,” he said. “That timeline is unfortunately being pushed into next year.”
American, which is based in Fort Worth, Texas, is taking steps to remedy the problem, such as trimming global capacity and changing pricing models typically used in the industry. The addition of Basic Economy fares, intended to compete better with low-fare rivals by selling tickets without benefits like assigned seating, will happen later this year but not affect sales until 2017. Delta already uses such fares and United is working on a similar program.
American reported that first-quarter adjusted profit dropped from a year earlier to $1.25 a share, topping the $1.19 average of analyst estimates compiled by Bloomberg. Revenue declined 4 percent to $9.44 billion, meeting expectations. The results fell as American took provisions for future income taxes.
“We’re disappointed in the revenue performance on an absolute basis and in comparison with our peers,” Chief Executive Officer Doug Parker said on the call. “We don’t view the current revenue trends as acceptable or long term.”
Average fare per mile slipped 7.1 percent at American, which has vowed not to lose passengers to discount carriers such as Spirit Airlines Inc. and Frontier Airlines Holdings Inc. American paid 34 percent less for each gallon of jet kerosene, helping to make up for some of the fare discounting.
The airline addressed sagging international demand this month by trimming its 2016 expansion plans, in part by shaving overseas capacity growth to 2.5 percent from 6 percent. Domestic capacity will rise 2.5 percent versus the 2 percent initially planned.
Delta and United have said they’re ready to cut available seats if flagging fares don’t begin to turn around. Reducing capacity in some markets would better match demand, allowing airlines to boost ticket prices.