American Airlines Group Inc. tumbled to the lowest in more than two years amid doubts over whether recent fare gains will be enough to cover the upward trek of oil prices.
The carrier’s average cost of jet fuel rose to as much as $2.33 a gallon in the third quarter, up from an earlier forecast of $2.27 or less, according to a company statement. For investors, that outweighed American’s steady gains in pricing power.
“Increased revenue in the third quarter wasn’t enough to offset higher fuel costs, suggesting that margin expansion is unlikely to occur until 2019,” Helane Becker, a Cowen & Co. analyst, said in a report.
The cost pressures mean American will have to work harder to pare expenses and improve operations as a way to boost profit margins, Becker said. The Fort Worth, Texas-based airline also said pretax income would be reduced by $50 million in the third quarter because of 2,100 flights grounded by Hurricane Florence last month.
The shares dropped 6.5 percent to $33.55 at the close of trading in New York, the lowest since August 2016. American’s drop was the biggest on a Standard & Poor’s index of nine US
airlines. The company has tumbled 36 percent this year, the biggest decline among US carriers.
American’s update on its third-quarter performance contained some bright spots. Prices improved for domestic tickets purchased just before travel in the third quarter. Total revenue for each seat flown a mile, a proxy for pricing power, increased 2 percent to 3 percent. That was half a percentage point higher at the midpoint than the previous forecast.
The airline maintained its expectation for an adjusted pretax margin of as much as 7 percent. “I am surprised by the weakness in American shares,” said Savi Syth, an airline analyst at Raymond James Financial Inc. “We thought the update was positive. And while fuel has moved higher, shares already fell on that.”
But any concern about fuel hits American particularly hard, said Adam Hackel, an Imperial Capital analyst. When the airline merged with US Airways in 2013, it adopted that carrier’s policy of not buying hedging contracts that lock in the price for some of its fuel. The price of jet kerosene has increased 39 percent over the past year. Fuel and labor are the largest expenses for airlines.
“A lot of these guys don’t have the same hedge books they used to,” Hackel said. “But American came out early and said ‘We’re not going to hedge fuel.’ Within the market, they are known as the unhedged guy.”