American Airlines shares drop on early signs of weakening pricing power

By Shivansh Tiwary

(Reuters) -American Airlines raised its annual profit forecast on Thursday on strong travel demand, but its shares slipped 6% on growing worries that the aviation sector’s ability to keep prices high without hurting demand was weakening.

The airline expects total revenue per available seat mile, a proxy for pricing power, to be down about 4.5% to 6.5% in third quarter compared to a year ago, which brokerage Jefferies said was below their consensus.

Increasing capacity and fears of a slowdown in the second half of the year are beginning to weigh on ticket prices even though the carrier remained bullish on demand as consumers cut their spending on goods for experiences.

Latest U.S. inflation data showed a third consecutive monthly decline in airline fares, dropping at their fastest pace year-over-year since February 2021.

“As carriers continue to add capacity and restore their hubs, our experts expect pricing power to further diminish in H2 2023,” Third Bridge senior analyst Christopher Raite said.

Some analysts were also disappointed by American’s margin forecast.

“American’s full-year adjusted EBIT margin guide of 8% to 10% trail’s Delta’s guide of >12% and also looked a little underwhelming vs. United’s robust 2023 EPS guide of $11 to $12,” Citi analyst Stephen Trent said.

The tepid margin view comes as American prepares to spend more and match the pilot contract of United Airlines, which offered 34.5% to 40.2% in cumulative pay raises in a new four-year deal.

American forecast adjusted profit of $3.00 to $3.75 per share compared with its prior outlook of $2.50 to $3.50 per share for 2023.

Its adjusted net income of $1.92 per share for the quarter ended June 30 exceeded expectations of $1.59.

Total operating revenue rose 4.7% to $14.06 billion and beat estimates of $13.74 billion.

Shares of rivals Delta Air Lines and Southwest Airlines were also down about 1.6% each in early trading.

(Reporting by Shivansh Tiwary in Bengaluru; Editing by Arun Koyyur)