American Air Sinks as Rising Labor Costs Weigh on Profit Outlook

  • Forecast suggests short-term earnings estimates need trimming
  • Benchmark revenue gauge ticks up for first time in two years

American Airlines Group Inc. shares slumped the most in five months as higher labor costs are set to drag down profit.
 
The carrier’s first-quarter outlook for a gross profit margin of 3 percent to 5 percent suggests earnings of about 50 cents a share, JPMorgan Chase & Co.’s Jamie Baker said in a note to clients. That compares with the 66-cent average of estimates compiled by Bloomberg.

“We unequivocally anticipate a softening of consensus,” Baker said.

American is paying more for labor, its biggest expense, after agreeing to higher wages for flight attendants, mechanics and baggage handlers. That’s pressuring the bottom line even as slower growth in flights and seats enables the Fort Worth, Texas-based carrier to regain some pricing power over airfares.

The shares fell 5.1 percent to $47.07 at 12:31 p.m. in New York, the biggest intraday decline since Aug. 2. The slide dragged down other carriers on the Bloomberg U.S. Airlines Index, which dropped 1.9 percent.

Rising expenses are already taking a toll on American’s pretax gross margin, which fell to to 7.9 percent in the fourth quarter from 13 percent a year earlier. First-quarter costs for each seat flown a mile are likely to rise between 8 percent and 9 percent, primarily due to new union contracts. The airline said growth in the cost measure would slow through the rest of 2017.

Pricing Rebound

While profit pressures are increasing, American is also regaining more control over airfares after slowing capacity growth last year to bring supply in line with demand. A pick up in travel in late 2016 is fueling sales of last-minute tickets typically purchased by business travelers at higher fares.

Total revenue for each seat flown a mile, a proxy for pricing power known as unit revenue, rose 1.3 percent in the fourth quarter, the first increase since late 2014. That made American the first major U.S. carrier to halt a slide triggered mainly by a fare war that erupted in early 2015. The measure will climb 2.5 percent to 4.5 percent this quarter and increase in each subsequent quarter, the company said.

Delta Air Lines Inc. and United Continental Holdings Inc. have also been paring expansion plans in an effort to achieve the same turnaround in unit revenue.

‘Capacity Discipline’

“Maintaining good capacity discipline, in addition to the economy continuing to hold up, will be necessary to maintain this,” said Savanthi Syth, an analyst at Raymond James Financial Inc. “The incentives are there with rising fuel and non-fuel costs.”

Capacity this year will rise 1 percent, with no change in domestic markets and a 4 percent increase on international routes. American could consider boosting domestic growth and trimming international later in the year, depending on demand, the airline said.

Fourth-quarter adjusted earnings were 92 cents a share, matching the average of analysts’ estimates compiled by Bloomberg. Sales rose 1.7 percent to $9.79 billion, topping the $9.74 billion projected by analysts.

American’s profit excluding special items fell 63 percent to $475 million, in part because of a 17 percent increase in spending for labor, its largest single expense. Fuel costs also rose.

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