Airline stocks fell after American and Spirit lowered their current quarter guidance on Wednesday (13th September). This blog looks at the reason for this and what to expect.
What the Airlines Say
After American Airlines (AAL) and Spirit Airlines (SAVE) issued a warning that higher fuel prices and other expenses may damage profits in the crucial summer travel season, airline stocks fell.
American claimed that increased fuel costs and costs associated with its new pilots’ contract would reduce profit and tighten operating margins. Spirit pointed the finger at more discounts during the pre-Thanksgiving travel season as well as rising fuel prices.
In addition to increasing fuel expenditures, Spirit reported that in recent weeks, there has been “higher promotional activity with steep discounting for travel booked for the second half of the third quarter through the pre-Thanksgiving travel period.” As a result, the airline lowered its revenue forecast for the third quarter from $1.30 billion to $1.32 billion to a range of $1.25 billion to $1.26 billion. In contrast to its earlier prediction of a decline of 5.5% to 7.5%, the company now expects its operating margin to shrink by 14.5% to 15.5%.
What Has Changed?
American reduced its earlier forecast for current-quarter earnings per share (EPS) from $0.85 to $0.95 to between $0.20 and $0.30. The airline said that after providing its initial guidance in July, gasoline prices “have increased considerably.” In contrast to earlier predictions of $2.55 to $2.65 per gallon, it now expects average fuel costs of $2.90 to $3.00 per gallon. Additionally, American stated that the new labour agreement reached with its pilots will result in a $0.23 decrease in EPS and a 1.7 percentage point reduction in operating margin.
The Effects on Shares
American shares decreased by roughly 4% in midday trade Wednesday, while Spirit decreased by around 2.5%. Cost increases have shaken the airline sector, with recent cuts to third-quarter forecasts from Alaska Air Group (ALK) and Southwest Airlines (LUV). As of 11 a.m. ET on Wednesday, shares of other significant airlines, such as Delta Air Lines (DAL), declined along with American and Spirit.
This pattern is expected to continue throughout the autumn, with many other airlines following suit. While this is perhaps no surprise, it will likely impact shareholders for some time.
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