American Airlines Beats Estimates, Defers Airbus A350s and Guides to Positive Unit Revenue

American Airlines (AAL)  beat first-quarter earnings estimates, expects to report positive unit revenue in the current quarter, and will defer delivery of a new aircraft type.

American reported first-quarter earnings hours after it said it will award pilots and flight attendants pay increases that total about $1 billion over the next two and a half years.

The pay increase troubled some analysts. In pre-market trading, American shares fell 5% in premarket trading.

Excluding items, American reported a first quarter net profit of $308 million, or 61 cents a share. Analysts had estimated 57 cents. Revenue rose 2% to $9.6 billion.

The carrier also said it will defer the first delivery of Airbus A350 XWBs to 2020 from 2018, delaying capital expenditures and providing additional fleet flexibility.

Looking ahead, American guided toward a current-quarter total revenue per seat mile gain between 3% and 5% and to a current quarter pretax margin between 11% and 13%.

Full-year 2017 capacity will rise 1.5%, with domestic flat and international up 4%.

On the cost side, cost per available seat mile excluding fuel and special items will gain 7% in the current quarter and 5% for the full year, the carrier said. Much of the gain reflects higher labor costs.

In the first quarter, CASM excluding fuel and special items rose 7.6%, primarily due to a 6.5% gain in labor costs and other unspecified investments "to improve the operation."

"We are excited about the long-term prospects for American Airlines, and our first-quarter results only serve to reinforce our enthusiasm," said CEO Doug Parker in a prepared statement.

American took delivery of 22 new aircraft during the first quarter, Parker said, but the investment "is not enough to retain our customers' loyalty if we are not investing in our team. As a service business, it is our team who will differentiate American from the competition."

The 2% gain in total revenue included a 9.3% gain in "other revenue" beyond passenger revenue, primarily due to the new co-branded credit card agreement that became effective in the third quarter of 2016, American said. Total revenue per available seat mile rose 3.1% on a 1.1% decline in capacity.

American said the introduction of basic economy fares has led to passenger choices to purchase a higher fare. "Approximately 50% of customers who are presented with a choice for basic economy end up choosing a main cabin fare," said President Robert Isom in a prepared statement.

The carrier also said it repurchased 11.7 million shares of stock for $512 million during the first quarter.

American plans to invest $4.1 billion in new aircraft in 2017 and will take 22 Airbus A350s from 2020 through 2024. The A350 deferral will reduce planned capital expenditures by $500 million in 2018 and $300 million in 2019 and 2020.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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