American Airlines Cuts Q2 Guidance Amid Growing Travel Demand

Travel demand remains strong as the busy summer season begins, but American Airlines (AAL, Financial) has cut its Q2 EPS, adjusted operating margin, and TRASM guidance, causing shares to drop. This downgrade came on the same day that the TSA reported a record number of screened travelers on May 24, with five of the busiest days in U.S. aviation history occurring this May.

United Airlines (UAL, Financial) quickly reassured investors by reaffirming its Q2 EPS guidance of $3.75-$4.25 following AAL’s update.
AAL’s SEC filing lacked details on the reasons behind its reduced outlook, raising concerns about industry-wide issues. However, AAL later explained at the Bernstein Annual Strategic Decisions Conference that it is experiencing softness in bookings and a domestic supply and demand imbalance, leading to a weaker domestic pricing environment.
During Q1 earnings reported on April 25, AAL missed EPS expectations with unit revenue decreasing by 4.9% year-over-year, compared to a 0.6% increase for UAL and a 1% increase for Delta Air Lines (DAL, Financial). AAL cited unique impacts from industry capacity on its network.

The key question is why AAL is underperforming relative to its peers.

In Q1, AAL’s international revenue growth of 4.3% lagged behind DAL’s 12% and UAL’s 16%. International flights are generally more profitable, and AAL’s strategy has focused on expanding its U.S. network, particularly in the south and southeastern markets.
AAL has aggressively cut costs, including workforce reductions on the sales side. This is reflected in its CASM-ex metric, which was up 2.3% in Q1 compared to UAL’s 4.7% increase. For Q2, AAL now expects CASM-ex to be flat to +1%, down from its prior guidance of +1% to +3%.
AAL announced that Chief Commercial Officer Vasu Raja will depart in June 2024, with Vice Chair and Chief Strategy Officer Stephen Johnson temporarily leading the commercial organization. The new Chief Commercial Officer will focus on reclaiming market share from UAL and DAL, particularly in corporate business deals.

The main takeaway is that AAL’s guidance cut reflects sales execution issues, especially in the international business, rather than a broad-based downturn in travel demand.