Surging fuel and plunging stock: American Airlines CEO in the hot seat for quarterly earnings

Key Points
  • American Airlines reports third-quarter earnings before the market opens on Thursday.
  • The airline's stock is down close to 42 percent this year, more than any U.S. airline.
  • American Airlines is the world's biggest airline.
An aerial view of an American Airlines jet preparing to takeoff.
Digital First Media Group/Orange County Register via Getty Images | Digital First Media | Getty Images

American Airlines' CEO Doug Parker will be in the hot seat this week as he and the executives at the world's biggest airline try to convince investors it can offset a surge in fuel costs and attempt to stem the carrier's stock slide of more than 40 percent this year.

American is set to report on Thursday before the market opens its profits from the third quarter, which includes the peak summer travel season.

Travel demand has been robust this year, American and its competitors have said. But American's shares this month slumped to the lowest level in two years — the biggest percentage decline of any other U.S. airline — after the carrier reported higher-than-expected fuel costs, generally airlines' second-largest expense after employee salaries.

Analysts polled by Refinitiv, formerly Thomson Reuters, expect American to post per share adjusted earnings of $1.13, a roughly 21 percent decline from a year earlier, and revenue of $11.57 billion, an increase of 6.3 percent from the July-September quarter of 2017.

Despite the more than 30 percent increase in the cost of jet fuel, competitors United Airlines and Delta Air Lines earlier this month said they were able to recover much of that increase thanks in part to higher fares and stronger demand for premium-cabin seats, like business class, where seats fetch a steep premium to coach class.

The pressure is now on American's management to prove it can cope with higher fuel and make improvements to on-time arrivals, where it has lagged its rivals for most of the year, according to Department of Transportation data.

American's share slide of nearly 42 percent so far in 2018 compares with an almost 22 percent gain in United's stock price. United struggled last year and in early 2018 as investors grew skeptical about its cost outlook and aggressive growth plan. Delta's shares are off about 8 percent this year.

"Sentiment on AAL may be as bad as it's been since the shares started trading in 2013," wrote Wolfe Research airline analyst Hunter Keay in an Oct. 19 note. "To some, the situation feels hopeless."

Keay said that American's problems together represent a "toxic mix," and recommended the airline improve its on-time operations and focus on feasible long-term goals.

Last week, however, Deutsche Bank upgraded Delta and American, citing solid travel demand from consumers and the recent stock slide as an "attractive entry point."

American's executives plan to hold a conference call at 8:30 a.m. ET.

Among the topics investors are likely to discuss in relation to covering higher fuel costs is cabin segmentation. American and its competitors have been slicing their economy cabins into smaller sub-classes that begin with a bare-bones basic economy (final boarding group, no ticket changes, advance seat selection) to premium economy, which offers more legroom, amenities kits and other perks for a fare that's sometimes double that of regular coach.

Investors will be interested in the uptake of the more expensive fares as the carrier tries to offset higher fuel. American last month removed an overhead bin restriction on basic economy tickets, which brought these fares more in line with those of Delta.

Management will also likely detail the progress of the reconfiguration of its narrowbody jets, which will include more seats on board, a move that can drive down the cost of operating a flight. The airline's planned growth for 2019 is another topic of interest. The airline has scrapped money-losing routes as it seeks to focus on more profitably flying as costs rise.

— Correction: This article has been updated to reflect that American Airlines shares this month slumped to the lowest level in two years after the carrier reported higher-than expected fuel costs, which are generally airlines' second-largest expense after employee salaries.

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