American Airlines (AAL) Gains Altitude After Lifting Q4 Guidance On Resilient Air Travel Demand
3:37 pm Tuesday, January 11th, 2022
With Delta Air Lines (DAL) poised to report earnings before the opening bell on Thursday morning, American Airlines (NASDAQ:AAL) set the stage in a positive fashion by lifting its 4Q21 revenue guidance. After originally guiding for a ~20% decline in revenue versus 4Q19, AAL now expects a drop of about 17%, penciling out to revenue of roughly $9.4 bln. Battered by the Omicron variant, which has caused thousands of flight cancellations over the past few weeks, AAL’s brighter outlook comes at an ideal time for the besieged industry.
In particular, its improved revenue guidance puts the spotlight back on a demand environment that has remained incredibly resilient in the face of surging virus cases. Back on December 7, Southwest Air (LUV) also raised its Q4 guidance, forecasting a top-line decline of 10-15% compared to its prior outlook of down 15-25%. Although LUV’s upwardly revised guidance came before this recent burst in new virus cases, AAL’s enhanced outlook indicates that the upswing in travel demand has remained firm.
However, AAL has not flown through this wave of new virus cases completely unscathed and there’s still plenty of turbulence to work through, including the following items:
While leisure travel has recovered to pre-pandemic levels, business travel remains sluggish. The good news, though, is that incoming CEO Robert Isom stated during a recent CNBC interview that he expects business travel to return to pre-pandemic levels this year.
Staff shortages and the resulting flight cancellations have cut AAL’s capacity, which is pushing cost per available seat mile (CASM) higher. The company now anticipates CASM to be up 13-14% compared to its previous forecast of 8-10%.
Rising fuel costs pose another risk to pre-tax margins, especially if geopolitical tensions escalate.
The possible reintroduction of new travel restrictions and/or lockdown measures from governments could provide a headwind. When asked about the future general impact of Omicron during an interview last week, COO David Seymour stated, “I don’t know how it’s going to play out. The one certainty of COVID and the pandemic is there’s a lot of uncertainty.”
Overall, AAL is effectively navigating through the impact of the Omicron variant, as evidenced by its improved Q4 pre-tax margin guidance of (12)%-(13)% versus its prior outlook of (16)-(18)%. Leisure travel demand in particular has remained strong and flight cancellations appear to be slowing across the industry. These are all favorable data points, but uncertainties still abound for AAL and its peers as we close in on two years of dealing with the virus.
