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Delta Air Lines (NYSE: DAL) stock plunged in early January, after the No. 2 U.S. airline cut its unit revenue guidance for the second time in the span of a month. Delta announced that revenue per available seat mile (RASM) was on track to rise 3% in the fourth quarter, compared with its previous forecast for a 3.5% gain and its initial projection that RASM would increase 3% to 5%. The fact that adjusted earnings per share will come in near the high end of Delta's guidance range didn't seem to matter to investors.
On Thursday, it was American Airlines' (NASDAQ: AAL) turn to slash its RASM forecast for the fourth quarter. To make matters worse, the world's largest airline also trimmed its EPS outlook. Nevertheless, investors may be underestimating American Airlines' future prospects.
Another guidance cut
Back in October, American Airlines projected that RASM would rise 1.5% to 3.5% in the fourth quarter. That would have been roughly in line with the 2.7% RASM growth it achieved in the first three quarters of the year.
Image source: American Airlines.
Like Delta, American now expects RASM to come in at the bottom of its initial guidance range (i.e., up 1.5%). Management said that the guidance reduction was "due primarily to a lower than anticipated improvement over a strong fourth quarter of 2017 in the domestic market." This statement was similar to the language Delta used to explain its unit revenue miss.
American Airlines still expects to report roughly flat nonfuel unit costs for the fourth quarter. Meanwhile, it reduced its Q4 fuel cost estimate by $0.08 per gallon. That should have offset most of the carrier's RASM shortfall.
Nevertheless, American Airlines reduced its adjusted EPS forecast to a range of $4.40 to $4.60 from its prior estimate of $4.50 to $5. This caused American Airlines stock to plunge as much as 11% on Thursday, before recovering to end the day down 4% and within striking distance of its 52-week low.
American Airlines Stock Performance, data by YCharts.
It's not as bad as it looks
Just based on the headline numbers, it may seem that American Airlines' unit revenue growth is on the verge of stalling out. That would be bad news for investors.
However, American Airlines was facing an especially tough year-over-year RASM comparison last quarter. In the fourth quarter of 2017, unit revenue surged 5.6%. By contrast, American's RASM grew at less than half that rate in 2018. This suggests that even if underlying revenue trends stay constant, American Airlines' unit revenue performance should improve in 2019.