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American Airlines Stock Tanks After ‘Surprising’ Guidance Cut
American Airlines (AAL) shares are taking a hit in mid-day trading after the company announced the departure of Vasu Raja, its chief commercial officer, and issued revised guidance that came as a big disappointment to investors.
On a archivingAmerican said it now sees adjusted earnings per share for the current second quarter in the range of $1.00 to $1.15, down from its previous forecast of $1.15 to $1.45.
Even more disturbing was the revision of a key metric known as TRASM, or total revenue per available seat mile, a measure of airline revenue growth and efficiency. American’s TRASM guidance for the second quarter is now expected to decline approximately 5% to 6%, compared to its previous forecast of a decline of 1% to 2%. Operating margin also fell 1%, in a range of approximately 8.5% to 9.5%.
American shares are having their worst day since June 2020, during the height of the pandemic.
“We were surprised by the level of the guidance cut, but the factors behind it are probably not surprising to us,” Raymond James managing director Savi Syth told Yahoo Finance. “And we’ve mentioned this before, a lot of capacity, including in the U.S. and in the industry [is a problem].”
The revisions come ahead of the busy summer season for leisure travelers, which has become busier as pandemic conditions ease. Trip numbers at TSA checkpoints reached a new record for the year on May 24, with more than 2.9 million travelers flying ahead of Memorial Day weekend and the numbers increasing each day during the weekend compared to the previous year.
American Airlines rival, United Airlines reiterated its profit guidance for the second quarter. The Chicago-based airline projected earnings per share in the range of $3.75 to $4.25, signaling it sees a strong summer travel season ahead.
“Demand remains, but there is more price sensitivity,” Syth said regarding the overall travel sector, but noted that during peak periods like Memorial Day and Labor Day price sensitivity is not an issue.
Even as travelers look for better deals, they continue to fly, and American Airlines’ inability to capture more leisure and business travel is a concern for investors. Syth noted that American’s excess capacity during the off-peak travel season was another issue, but the airline said it was addressing excess capacity during its first-quarter earnings call last month.
An American Airlines plane descends the runway at Denver International Airport on January 16, 2024, in Denver. American Airlines is reducing some of its financial forecasts for the second quarter and announced the departure of its chief commercial officer. (AP Photo/David Zalubowski, File) (ASSOCIATED PRESS)
The departure of American’s former chief commercial officer, Vasu Raja, also made headlines. Raja’s moves to reduce long-haul flights, along with changes to the company’s sales force and reservations process and reduced emphasis on business travel, may have hurt American relative to its peers.
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One move Raja made that differed from his competitors was the focus on NDC (new distribution capacity), a platform that allowed travel agents and third-party websites to access airline fares and schedules. The implementation of the NDC system suffered from technical problems, but Raja wanted promote more American fares through its own website and NDC-powered sites either way, ultimately limiting the ability of consumers and business travelers to purchase American flights.
“Aggressive pressure on the NDC was right… but doing so at the same time as reducing its sales force and making other changes was not wise,” Syth said.
Syth also praised American’s decision to backtrack on another Raja initiative, which would have given shoppers more miles from American’s loyalty program for booking flights on American’s website or with preferred partners.
Although American is not considered a discount airline, Syth said the airline’s focus on the Sunbelt and vacation states like Florida for leisure travelers has come at the expense of profitable locations for business travel. While she is confident that CEO Robert Isom is up to the task of reversing some operational mistakes, it won’t happen overnight.
“I really think it all comes down to your grand corporate strategy, [and] I think the execution wasn’t good,” Syth said of American’s focus on leisure travel. “They are suffering from it now and it is reversible, but it will take time.”
Pras Subramanian is a reporter for Yahoo Finance. You can follow it Twitter and so on Instagram.
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