American Spurs Airline Gains After Raising Margin Forecast

Jul 09, 2014 4:34 pm ET

(Updates with closing share prices in seventh paragraph.)

July 9 (Bloomberg) -- American Airlines Group Inc. rose after saying second-quarter pretax margins probably exceeded its forecast, spurring gains among U.S. carriers.

The new margin projection is 12 percent to 13 percent, compared with 10 percent to 12 percent previously, the world’s biggest carrier said today. The numbers indicate quarterly profit probably beat analysts’ average estimate of $1.80 a share, according to Jamie Baker of JPMorgan Chase & Co. and Helane Becker, a Cowen & Co. analyst.

American’s results provided positive news for the U.S. industry after Air France-KLM and Deutsche Lufthansa AG, Europe’s biggest carriers, each trimmed their profit outlooks in the past month. Last week, Delta Air Lines Inc. said excess capacity in some international markets had eroded fares.

“Overall, the guidance was solid and provides further evidence that 2Q was a very strong quarter for the airlines,” Becker said in a note to investors.

Becker, who rates the shares outperform, raised her second- quarter earnings estimate to $1.96 a share from $1.72 and her full-year projection to $5.20 from $4.85, while Joseph DeNardi at Stifel Nicolaus & Co. increased his to $1.92 from $1.63. He has a buy recommendation. Baker, who rates American overweight, trimmed his quarterly estimate to $1.98 from $2.03.

Revenue Gauge

Second-quarter revenue from each seat flown a mile, a benchmark industry gauge, probably rose 5.5 percent to 6.5 percent, compared with a forecast of 5 percent to 7 percent, American said.

American rose 4.3 percent to $41.99 at the close in New York. Southwest Airlines Co. gained 1.9 percent to $27.21, Delta increased 1.4 percent to $36.96 and JetBlue Airways Corp. climbed 1.6 percent to $10.66.

The Bloomberg U.S. Airlines Index had fallen 6.8 percent in the past week following the Air France-KLM and Delta comments. American Chief Executive Officer Doug Parker yesterday said travel demand remains good worldwide, with no “material pockets of weakness.”

Recent declines in U.S. airline shares represent a buying opportunity, Michael Linenberg, a Deutsche Bank analyst, said in a report yesterday.

“With the stocks having gone from being overbought to the cusp of oversold in less than a month, we see an emerging opportunity for long-term investors to initiate/add to positions” in carriers including American, United Continental Holdings Inc., Delta and Southwest, he said.

International Routes

Southwest said today unit revenue rose an estimated 7 percent to 8 percent in June from a year earlier, and more than 8 percent in the second quarter. Passenger traffic for the Dallas-based airline also climbed in both periods

American’s load factor, or the average number of seats filled per plane, fell in Atlantic markets and to Latin America last month, contributing to a 5 percent decline for all international routes, where the carrier increased capacity 7 percent. Passenger traffic rose in all markets last month except Latin America, where it fell 0.1 percent.

During the second quarter, American sold its remaining fuel-hedging contracts, adopting the strategy of merger partner US Airways Group Inc. The airline, based in Fort Worth, Texas, will take a non-cash $330 million tax charge related to the sales, according to a filing today.

“As of June 30, 2014, we do not have any fuel hedging contracts outstanding,” American said in the filing. Such agreements are designed to flatten the effect of fuel price swings. The airline declined to disclose proceeds from the sales.

American also will report $250 million to $300 million in special charges primarily related to its bankruptcy and merger.