American Airlines stock tanks following ‘surprising’ guidance cut

American Airlines stock tanks following ‘surprising’ guidance cut

American Airlines (AAL) stock is getting hit in midday trade after the company announced the departure of Vasu Raja, its chief commercial officer, and issued revised guidance that was a huge letdown for investors.

In a filing, American said it now sees adjusted EPS for its current second quarter coming in between $1.00 and $1.15, down from its prior forecast of $1.15-$1.45.

Even more unsettling was the revision it sees in a key metric known as TRASM, or total revenue per available seat mile, a measure of the airline’s revenue growth and efficiency. American’s TRASM guidance for Q2 is now expected to be down approximately 5% to 6%, compared to its prior forecast of down 1% to 2%. Operating margin was also seen down 1%, in a range of approximately 8.5% to 9.5%.

Shares of American are having their worst day since June 2020, during the throes 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 called this out before, too much capacity, American-inclusive and in the industry [is a problem].”

The revisions come ahead of the busy summer season for leisure travelers, which has grown busier as pandemic conditions eased. TSA checkpoint travel numbers hit a new high for the year on May 24, with over 2.9 million travelers flying ahead of Memorial Day weekend and numbers across the board increasing every day through the weekend compared to a year ago.

American Airlines rival United Airlines reiterated its profit guidance for the second quarter. The Chicago-based airline projected EPS in a range of $3.75 to $4.25, signaling it sees a strong summer travel season ahead.

“Demand is holding, but there is more price sensitivity,” Syth said with regard to the overall travel sector, but noted that during peak periods like Memorial Day and Labor Day price sensitivity isn’t an issue.

While travelers are seeking out better deals, they are still flying, and American Airlines’ inability to capture more leisure and business travel is a concern for investors. Syth noted that American’s excess capacity during off-peak “shoulder” travel season was another issue, but the airline said it was addressing overcapacity during its Q1 earnings call last month.

American Airlines stock tanks following ‘surprising’ guidance cut

An American Airlines jetliner rumbles down a runway at Denver International Airport, Jan. 16, 2024, in Denver. American Airlines is lowering some of its second quarter financial forecasts and has announced the departure of its chief commercial officer. (AP Photo/David Zalubowski, File) (ASSOCIATED PRESS)

The departure of American’s longtime chief commercial officer, Vasu Raja, also grabbed headlines. Raja’s moves to reduce long-haul flights, along with the changes to the company’s sales force and booking process and deemphasis on business travel, may have hurt American versus its peers.

One move Raja made that differed from competitors was a focus on NDC (New Distribution Capability), a platform that allowed travel agents and third-party sites to access airline fares and schedules. The NDC system rollout suffered technical issues, but Raja wanted to push more of American’s fares through its own website and NDC-powered sites anyway, ultimately limiting consumers’ and business travelers’ ability to purchase American flights.

“The aggressive push on NDC was right … but doing it at the same time that you slash your sales force and make some other changes was not wise,” Syth said.

Syth also lauded American’s decision to backtrack on another Raja initiative, which would have given buyers more American loyalty program miles for booking flights on American’s website of preferred partners.

While American isn’t considered a discount airline, Syth said the airline’s focus on the Sunbelt and vacation states like Florida for leisure travelers came at the expense of lucrative business travel locations. Though she is confident CEO Robert Isom is up to the task of reversing some operational mistakes, it will take time.

“I really think it comes back down to their large corporate strategy, [and] I think execution was not good,” Syth said in regard to American’s focus on leisure travel. “They’re hurting from that now, and it is reversible, but it will take time.”

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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