Airline Stock Roundup: AAL & SAVE's Q3 Fuel Cost Warning, GOL & AZUL's Traffic

In the past week, management of airline companies — American Airlines AAL and Spirit Airlines SAVE — increased their respective projections for third-quarter 2023 fuel price per gallon. With oil price moving north, some other airlines echoed similar sentiments and increased their respective fuel price per gallon projections for the September quarter. That story was covered in detail in the previous week’s writeup.

Latin American carriers, Gol Linhas GOL and Azul AZUL reported a double-digit increase in consolidated revenue passenger kilometers (a measure of air traffic) for the month of August on the back of upbeat air travel demand.

Recap of the Past Week’s Most Important Stories

1. American Airlines’ management stated that “fuel prices have increased considerably since the company’s initial third-quarter guidance issued on Jul 20, 2023.” The company now expects fuel cost per gallon (inclusive of taxes) in the $2.90-$3.00 band (the earlier guidance was in the $2.55-$2.65 range).  AAL now expects total revenue per available seat miles (a measure of unit revenue) to decline 5.5-6.5% from third-quarter 2022 actuals (earlier estimate was a 4.5-6.5% decline). Fuel gallon consumption is now estimated to be $1,100 million for the third quarter (the earlier view was $1,090 million).

High fuel costs apart, the increase in labor costs, due to the deal with pilots, is also a reason behind the guidance cut. The deal has provisions for retroactive pay, as a result of which $230 million will be reflected as additional expenses in the September-quarter results. This retroactive expense is expected to impact third-quarter adjusted operating margin by approximately 1.7 points. Operating margin is now expected in the 4-5% band (earlier expectation was 8-10%).

Due to high labor costs, third-quarter non-fuel unit costs are now projected to increase in the 4-5% band (earlier outlook had called for a 4-6% increase). Available seat miles (a measure of capacity) are now expected to increase 6-7% from third-quarter 2022 actuals (earlier estimate was a 5-7% increase).

High labor and fuel costs prompted management to slash its third-quarter earnings per share (excluding net special items) view to the range of 20-30 cents from 85-95 cents expected earlier. Labor costs associated with the deal with pilots are likely to hurt earnings to the tune of 23 cents. AAL currently carries a Zacks Rank #3 (Hold).

2. Spirit Airlines’ management now expects third-quarter fuel cost per gallon to be $3.06 compared with the earlier projection of $2.80.  Fuel gallon consumption is still estimated to be $147 million for the third quarter. For third-quarter 2023, management now expects total revenues in the $1,245-$1,255 million range (earlier range: $1,300-$1,320 million). Adjusted operating margin is now expected to be between -14.5% and -15.5% (earlier view projected a decline of 5.5-7.5% from third-quarter 2022 actuals). The effective tax rate is projected to be 22.6%. Available seat miles are now anticipated to increase 13.4% from third-quarter 2022 actuals (earlier projection had called for a 13.7% increase).

3. For the month of August, Azul’s consolidated traffic increased 13.5% year over year. To match the increased demand situation, AZUL is expanding its capacity. In the same period, capacity grew 13.1% year over year. Since traffic growth was more than capacity expansion, the load factor (percentage of seats filled by passengers) increased 0.3 percentage points to 81.6% last month.

4. At GOL, the August readings for consolidated revenue passenger kilometers (a measure of traffic) and available seat kilometers (a measure of capacity) increased 11.6% and 7.7%, respectively, on a year-over-year basis. With traffic growth outpacing capacity expansion, the load factor for August 2023 improved to 84.4% from 81.5% in August 2022. The number of departures at GOL increased 17.8% year over year.

Price Performance

Most airline stocks traded in the red in the past week. As a result, the NYSE ARCA Airline Index declined 1.56% over the period to $57.81. Over the course of the past six months, the sector tracker was flat.

What’s Next in the Airline Space?

Stay tuned for the usual news updates in the space.
Gol Linhas Aereas Inteligentes S.A. (GOL): Free Stock Analysis Report

American Airlines Group Inc. (AAL): Free Stock Analysis Report

Spirit Airlines, Inc. (SAVE): Free Stock Analysis Report

AZUL (AZUL): Free Stock Analysis Report

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