American Airlines Earnings: Higher Costs and Slower Revenue Growth Crimp Margins

Key Morningstar Metrics for American Airlines

• Fair Value Estimate: $10.50
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of American Airlines’ Earnings

American Airlines’ AAL third-quarter results showed continued cost growth, even as the full-service carrier booked a revenue figure almost identical to the year-ago quarter. We incorporated the increase in persistent unit costs into our forecast, as well as slightly increasing ongoing capital expenditures, resulting in a fair value estimate reduction to $10.50 per share from $11.50.

We look past fluctuations in the price of jet fuel because airlines make a practice of incorporating them into their forward ticket prices. However, less volatile costs like labor and maintenance have been on the rise for American and its competitors, and we see these increases persisting over time. On $13.5 billion in quarterly revenue (just $20 million more than in the third quarter of 2022), American incurred $640 million less in fuel costs and $590 million more in salaries and wages. Maintenance and other operating expenses like ground handling, catering, and operating lounges added more than $350 million in costs last quarter, while other categories like rent, depreciation, and landing fees remained mostly flat.

While cost growth (which stems mostly from updated labor agreements) is affecting different airlines more or less equally, American turned in no revenue growth and sold 3 billion fewer passenger miles in the quarter than we anticipated. In contrast, Delta DAL saw a 14% rise in passenger revenue, including 17% growth from its premium bookings, and United UAL grew passenger sales by 14.6%, up 20% for premium seats. American reported just 7% growth in its premium revenue.

In these results, we see a comparative disadvantage for American, as it seems to face more price pressure for its seats than its full-service competitors. Our forecast reflects this in lower long-term yields at American than at the other big carriers.