American Airlines, United Airlines report earnings beats

American Airlines shares slide lower despite reporting an earnings beat, as United Airlines shares rise after topping estimates. Raymond James Managing Director Savi Syth reviews the outlook for airline stocks as they face travel demand tailwinds and headwinds in the form of pricing pressures and operational issues.

Video Transcript

SEANA SMITH: We're watching shares of airlines, American and United, on the heels of earnings. Both airlines beating the expectations from the street and also raising their guidance. But the stock's today moving in opposite directions. American Airlines under pressure, off just about 6.5%, as Wall Street had even higher expectations going into the quarter.

Joining us now for more, Savi Syth, Raymond James Managing Director. Savi, it's great to speak with you. So that modest outlook from American, that's one of the big reasons why we're seeing that stock under pressure today. Was American Airlines, was that report almost a reality check here for the industry on the heels of the extremely strong results that we got from United and Delta last week?

SAVI SYTH: Yeah. I think for American, the issue is, I mean, it was a really good outlook and guide. The revenue-- the top line outlook for the 3Q '23 was a little softer than what we were expecting and what the Street was expecting. And so I think that is just adding to fears of pent-up demand going away or a recession around the corner. And so it's not giving people confidence in the domestic market. And they're talking up the good guys at United and Delta to the strength in international. So I think that's what's weighing on American and the shares in part today.

ALEXANDRA CANAL: And it's an interesting story, too. If you look over long-term share price action, because despite the demand that we've seen, the positive data, if you take a look at a five-year of United, Delta, and American, they're all significantly down. American is actually down more than 50%. So what do you think it will take to get investors back on board to the levels that they once were at?

SAVI SYTH: Yeah. I think partly, you know, with United and American, the one thing we have to keep in mind is there was some share dilution there. But beyond that, I think, what is important is confidence of the sustainability of the current earnings projections. And again, if there's a fear that you're heading into a recession, I think people aren't just willing to give the same multiples as they did before.

And so I think we just need to show that, you know, there isn't this kind of demand or a cliff that's going to happen with especially the domestic consumer. And I think as you gain more confidence in that, I think you'll start to see the shares improving as well, because from a profitability of 2023 guide, I think they're already showing good resumption of profitability.

SEANA SMITH: Savi, how much pricing power do airlines still have? Because, yes, we have seen airfares cool a bit on a year-over-year basis. But still, air travel, air tickets are much higher than they were pre-pandemic.

SAVI SYTH: Look, I think, one, I think a lot of things are more expensive versus pre-pandemic. And so I think that's what you're seeing on the airline fare side, too. Even the jet fuel, it's not as high as it was last year. Last we went double, 2019. Now, you're about 20% above 2019. But you're still at prices that are above 2019.

So I think part of this is just the inflation that you've seen globally. And the other part of it is you did have a lot of fleets that were retired. You had Boeing and Airbus that are having difficulty delivering new aircraft. And so there is a real supply shortfall relative to demand that has come back very strong and, you know, back to kind of trend line level. So for that reason, I think there is pricing power here. And then you have a lot of costs that are going up that will, I think, keep those fares relatively high, which is what you're seeing today.

ALEXANDRA CANAL: And speaking of some of those costs, on the earnings call this morning, American did say it was committed to matching United when it comes to those pilot wages. How do you see those negotiations going? And what could that mean from a margin perspective?

SAVI SYTH: Yeah. The American pilots are already getting about a 21 pay increase with this new contract. It's really making up for the fact that, you know, during-- you're supposed to have a contracts, you know, early 2020 and the pandemic got in the way. So you're making up for a few years of not getting pay increases.

If they do match United, it's another 1% to 2%. So relative to what you are matching today, I don't think it's a significantly higher increase. So I think their 2023 guide isn't going to be significantly impacted by anything that they're matching with the United contract.

SEANA SMITH: Savi, one of the themes that we've heard from a number of airlines this quarter and also we started to hear about it last quarter was the pent-up demand for international travel. And international really being a standout, especially in this quarter's results. Do you see that accelerating into 2024?

SAVI SYTH: I think what you're seeing this year, you know, if you remember internationally the testing requirements really only came off in the June time frame. And so what you're seeing this year is last year, a lot of people were still taking domestic or near International trips, because that's where they could go easily and conveniently. And so this year, you're finally starting to see both on the leisure and business side more of those trips being taken internationally.

So-- so it is a little bit pent-up, in that you're catching up for some of that. But it's also kind of diverse, you know. You're getting some of the trips that was in the domestic market shifting to international. And I think you'll see-- you know, so we start to really kind of lap that maybe late this year, because, even though kind of the things were lifted, I think you really only started to see international comeback in a big way and kind of that late-- late 2022 time frame. So I think we still have another quarter or a couple of quarters of good international momentum.

ALEXANDRA CANAL: And on that international side, we're seeing extreme heat in Europe right now. Summer is usually a time where everyone wants to flock to Europe. So do you think those temperatures and what's happening overseas, could that potentially impact any earnings heading into next season?

SAVI SYTH: Yeah. I mean, it's definitely-- there are a lot of things going against operating a good airline. You know, the heat being one of them. There is air traffic control issues everywhere. And in Europe, you do have a lot of industrial action as well. And so I think airlines are taking that in stride and making the adjustments, because they do want to run a good operation, because that's the worst thing that can happen from a demand perspective is if passengers don't appreciate or don't have a good experience, they're not going to continue flying.

So you are seeing them, you know, tactically and strategically responding to some of these challenges. And it's not something that-- some of this will get better. ATC staffing should improve as time goes on. But some of it like weather, it's something that's here to stay. And that they'll have to continue to adapt.

ALEXANDRA CANAL: I'm trying to plan a trip to Europe in the fall. So hopefully, things are good then. But Savi Syth from Raymond James, thanks so much for joining us today.