American Airlines (AAL) shares are falling in midday trading after the airline announced the departure of Chief Commercial Officer Vas Raja and issued revised guidance that was a big disappointment for investors.
In the filing, American Airlines said it now expects second-quarter adjusted earnings per share to be between $1.00 and $1.15, down from its previous forecast of $1.15 to $1.45.
Adding to the anxiety, American Airlines has revised down a key metric called total revenue per available seat mile (TRASM), which measures an airline's revenue growth and efficiency. American Airlines' second-quarter TRASM guidance now sees a decline of about 5% to 6%, compared with a previous forecast of a decline of 1% to 2%. Operating margins are also expected to decline 1% to a range of about 8.5% to 9.5%.
American Airlines shares are suffering their worst day since June 2020, at the height of the pandemic.
“While we were surprised by the level of the guidance cut, the factors behind it probably aren't a surprise to us,” Savi Sis, managing director at Raymond James, told Yahoo Finance. “We've previously noted excess capacity across industries, including in the U.S..” [is a problem]”
The revision comes ahead of a busy summer season for leisure travelers, which is seeing increased crowds as pandemic conditions ease. The number of travelers at TSA checkpoints hit a new high this year on May 24, with more than 2.9 million travelers boarding planes ahead of Memorial Day weekend, and overall increases every day through the weekend compared to last year.
American Airlines rival United Airlines updated its second-quarter profit outlook. The Chicago-based carrier expects earnings per share in the range of $3.75 to $4.25, citing a strong summer travel season.
“Demand is sustained but price sensitivity is increasing,” Sis said of the travel industry as a whole, but noted price sensitivity is not an issue during peak periods such as Memorial Day and Labor Day.
American's inability to capture demand for leisure and business travel has been a concern for investors as travelers continue to fly while seeking better fares. Siss said excess capacity at American during off-peak, “shoulder” travel seasons is another issue, though the airline said it was addressing the overcapacity in its first-quarter earnings call last month.
Also in the spotlight was the departure of American Airlines' longtime chief commercial officer, Vas Raja, whose measures to cut back on long-haul flights, changes to the airline's sales force and booking process and a reduced focus on business travel may have hurt American relative to its peers.
One move that Raja made that set it apart from its competitors was to focus on New Distribution Capability (NDC), a platform that allows travel agents and third-party sites to access airline fares and schedules. Although there were technical issues with implementing the NDC system, it ended up limiting the ability of consumers and business travelers to purchase American Airlines flights, as Raja wanted to promote American Airlines fares more through its own website and NDC-enabled sites.
“Taking an aggressive approach to NDC was the right thing to do, but doing so at the same time as reducing the sales force and making other changes was unwise,” Sis said.
Sis also praised American Airlines' decision to scrap a separate Raja Airlines plan that would have given buyers extra miles in the airline's loyalty program if they booked tickets on the websites of American's preferred partners.
American Airlines isn't considered a low-cost carrier, but its focus on Sun Belt and vacation states like Florida for leisure travelers has come at the expense of lucrative business destinations, Mr. Sis said. He is confident CEO Robert Isom has the ability to reverse some of the operational mistakes, but it will take time.
“I think it comes down to their big business strategy. [and] “I think American Airlines' focus on leisure travel has been poorly executed,” Sis said. “They're hurting right now from that, and they can recover, but it's going to take time.”
Pras Subramanian is a reporter for Yahoo Finance. Follow him at twitter and Instagram.
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