American falls in airfare squeeze as discounters add seats
American Airlines Group Inc. fell the most among its U.S. peers after saying that airfares are starting to drop as low-fare domestic rivals add seating capacity in some markets.
The squeeze is showing up in an industry gauge of passenger revenue from each seat flown a mile. That benchmark will decline by 2 percent to 4 percent this quarter, American said Tuesday on a conference call - a forecast that overshadowed news such as a $2 billion stock buyback and $5 billion in 2015 fuel savings.
The projected decrease in Prasm, as the figure is known, exceeded the estimates of some analysts and followed forecasts for no change from Delta Air Lines Inc., United Continental Holdings Inc. and Southwest Airlines Co.
American "was much weaker than the rest of the industry," said Savanthi Syth, a Raymond James Financial Inc. analyst who expected a decline of 1 percent. "A weak Prasm spooks the market as investors are trying to figure out how much of the fuel price declines airlines will be able to capture."
American slid 3.6 percent to $53.46 at 12:46 p.m. in New York. That marked the biggest drop among 11 carriers in the Bloomberg U.S. Airlines Index.
Seating capacity is increasing in 50 markets, including some trans-Atlantic routes, American said. Many of the cities are served from Dallas, Philadelphia, Chicago and Washington, where discounters are expanding, according to the Fort Worth, Texas-based airline, which had to give up flying rights in Dallas and Washington in the 2013 merger with US Airways Group.
'Competing Aggressively'
"We're competing aggressively," President Scott Kirby said on the call. "We are matching the fares of our low-cost competitors. When you have that much new capacity in markets, it's going to put pressure on price."
Fred Lowrance, an Avondale Partners LLC analyst, estimated that American's Prasm would fall 1.5 percent. He said the airline's first-quarter capacity growth also is lower than his forecast. The airline foresees expansion of 2 percent to 3 percent, down a half-point from earlier projections.
"When capacity growth rates are slower, that should give Prasm a boost, all else being equal," Lowrance said by email. "The combination of a slower capacity growth rate and softer Prasm guidance is probably creating a little extra angst."
Lowrance, who is based in Nashville, Tennessee, rates American as market outperform. Syth, based in St. Petersburg, Florida, recommends the shares as outperform.
No Cuts
American sets fares according to demand and has no plans to trim prices because the carrier is paying less for fuel, its biggest expense. The airline will continue operating as if oil, which is refined into jet kerosene, were still $100 a barrel, Chief Executive Officer Doug Parker said, instead of the $46.14 West Texas Intermediate traded at Tuesday.
"What we believe is, pricing is tied to demand and demand remains strong," Parker said on the call. "That's what we should base our pricing on."
American's new stock buyback follows the completion of an initial $1 billion effort a year ahead of schedule. The latest program is targeted to be finished by the end of 2016, American said.
Quarterly profit excluding some items was $1.1 billion, or $1.52 a share, American said. That exceeded the $1.51-a-share average of 18 analyst estimates compiled by Bloomberg. American said it expects to pay $1.73 to $1.78 a gallon for fuel this quarter, compared with $3.06 a year earlier. It doesn't use contracts to protect against price swings in jet kerosene.
Carriers including American, Delta and United have used repurchases, dividends or both since 2013 to share cash with investors after bankruptcies, consolidation and nine years of losses through 2009 that totaled $58 billion.
American's board approved its first buyback plan in July, as financial benefits accrued faster than expected after the US Airways tie-up in December 2013. The airline also said then that it would pay a dividend, its first since 1980.