American Airlines Signals Even Faster Unit Revenue Recovery Than Delta

American Airlines on Friday said it could see, at long last, that rarest of things for the industry beginning in the fourth quarter: an actual increase in unit revenue.

The outlook would make American the first U.S. network carrier to push the key metric into positive territory after two years of expansion, fare cuts and a stronger dollar dragged it lower, and would outpace Delta Air Lines, which had sought to be the first but recently tamed expectations on when it might pull that off.

American's forecast is the latest good news for the airline industry, which in recent weeks has signaled greater operational discipline as fuel costs, which combined with labor make up an airline's biggest expenses, trend higher. A possible uptick in travel after the election, the prospect that President-elect Trump could roll back regulations on businesses, and investments from Warren Buffett's Berkshire Hathaway haven't hurt either.

American said it expects total unit revenue for Q4 to range from a 1% dip to a 1% gain, an improvement from an earlier forecast for a 0.5%-2.5% drop, and now sees adjusted pretax margin of 6%-8%, up from prior guidance for 5%-7%. The carrier hiked its forecasts due to improving yields — a measure of an airline's ability to charge travelers more for flights.

Unit revenue measures sales in relation to an airline's overall flight capacity and is seen as a purer gauge of how efficiently an airline does business.

"American will likely lead the industry in unit revenue performance in 2017 given the annualization of the credit card agreement (announced in 3Q16)," Cowen analyst Helane Becker said in a research note on Friday.

American's shares were up 2.5% just after midday on the stock market today, after rising as much as 5.4% earlier. Delta also pared gains sharply and was up just 0.1%. United Airlines added 2.6% after the carrier late Thursday also gave a more upbeat forecast on fourth-quarter unit revenue and reported strong November results. Southwest reversed lower and was off 0.6%.

Delta and Southwest shares are in buy range from this week's breakouts after briefly moving out of the 5% chase zone intraday.

Southwest CEO Gary Kelly, in an interview with Bloomberg on Thursday, also cited an uptick in booking trends, adding: "I think we are all feeling a little bit more spring in our step."

American Airlines said that traffic for November fell 0.2%, while capacity rose 0.1% and load factor, a measure of an airline's ability to fill seats on planes, fell 0.3 percentage points. Investors have wanted the airlines to keep capacity growth more even with passenger demand and move away from lowering airfare.

Still, the International Air Transport Association forecast that the airline industry's profits would fall next year as oil prices rise and that, overall, capacity would still exceed demand in 2017. Recent labor deals are also likely to drive up expenses for airlines.

(Bill Peters - Investor's Business Daily)