American Q4 Profit Likely Aided by Return to Normal Travel, Moderating Fuel Costs

A return to normal air passenger traffic from the depths of the pandemic likely aided a significant financial for turnaround American Airlines Group Inc. (AAL) in its recently completed fourth quarter. But the 2023 outlook for the nation's largest airline depends on just how persistent that demand proves amid the U.S. economy's uncertain direction.

American said in a Jan. 12 securities filing that it expects it earned $1.12 to $1.17 per share in the period, far more than its previous estimate of 50 cents to 70 cents and well above the $591 million, or 84 cents, that analysts had estimated before its announcement, according to Visible Alpha. Either way, Thursday's earnings report would represent a rebound from the $931 million, or $1.42 per share, that it lost in the same quarter a year earlier.

Source: Visible Alpha. Q4 2022 EPS and revenue reflect American Airlines' Jan. 12 projection.

American's report will likely underscore a nascent recovery in a U.S. airlines industry staggered by COVID 19 and surging jet fuel prices. It will mark the firm's third straight quarter of profitability after a nine consecutive quarters of significant pandemic-driven losses on a per-share basis.

Earlier this month, Delta and United both reported that strong travel demand and higher fares substantially boosted their fourth-quarter earnings, despite winter storms that crippled holiday air travel in the last week of the year.

American's Jan. 12 update quickly sent its shares up 10%, and they've rallied 28% since the beginning of the year. They gained 6% in the fourth quarter, trimming their 2022 loss to 29%, compared with an 11% gain and 20% loss, respectively, for the broader S&P 500 transportation industry group as measured by the SPDR S&P Transportation ETF (see chart below).

Loading Up

The fourth quarter capped a year of steady improvement for U.S. air travel. Load factors, or the percentage of available seating filled with passengers, increased throughout the industry. American's fourth-quarter load factor likely reached 84% for a third quarter after ranging from 42% to 80% from the first quarter of 2020 through the first quarter of 2022.

As travel demand increased, however, airlines faced soaring jet fuel costs thanks to intensifying inflation. Those costs moderated in the fourth quarter, as American's operating expenses likely climbed 16% compared with the same period a year ago, according to Visible Alpha. That's down from a 32% increase in the third quarter.

The U.S. Energy Information Administration expects jet fuel prices to decline further in 2023, averaging 15% less than last year. For airlines and their investors, though, whether the U.S. economy encounters a soft landing or a full-blown recession amid the Federal Reserve's interest-rate hike campaign to reduce inflation could determine whether a return to normal travel demand persists.

Assessing 2023

Earlier this month, officials at Delta and United expressed optimism that "the industry backdrop of air travel remains favorable," as Delta's CEO, Ed Bastian, said. Still, both airlines noted that labor costs remain problematic. United said airplane shortages and outdated technology could restrict the industry's capacity.

Southwest Airlines, which also reports fourth-quarter earnings on Thursday, received widespread criticism for failures to upgrade its technology as it struggled to reschedule flights caused by weather delays late last year. In addition, a system outage earlier this month at the Federal Aviation Administration (FAA) disrupted thousands of flights.

Still, Jamie Baker, an airline analyst with JPMorgan, said in a recent research report that travel demand composes both key upside factor and downside risk for American this year as the company keeps trying to reduce its substantial debt.

"We see execution needed on shoring up the balance sheet," Baker wrotein his report. "However, the leverage should benefit American's stock price in a rapid demand recovery we are beginning to see."