American Airlines (NASDAQ:AAL) shares dropped sharply on Wednesday after the airline reduced its profit forecast for the current quarter, citing weakened pricing power despite the anticipated record travel demand for the summer season.
In premarket trading on Wednesday, American Airlines’ stock fell nearly 8%, dragging down peers Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), and United Airlines (NASDAQ:UAL), which saw declines between 1.5% and 2.5%. On Tuesday, the Fort Worth, Texas-based company revised its second-quarter adjusted earnings forecast to a range of $1.00 to $1.15 per share, down from the previous expectation of $1.15 to $1.45 per share.
American Airlines has shifted its strategy away from profitable corporate travel to expand its market share in smaller markets. However, excess capacity in these markets has reduced its pricing power.
Jefferies, which had previously upgraded American Airlines due to cost controls, downgraded the stock to “hold,” stating that “the strategy has not gone as planned.”
The profit forecast cut comes just after the Memorial Day weekend, marking the start of the U.S. summer travel season, typically the most profitable period for airlines.
“A significant miss driven partly by last-minute bookings casts doubt on AAL’s ability to fully capitalize on a robust summer flying season,” said Bernstein analyst David Vernon in a research note.
While consumer spending in the U.S. remains strong, especially for premium travel, airfares in Europe and Asia have started to level off or decrease, indicating that the post-pandemic travel surge may be fading.
American Airlines’ shares are trading at about 4.89 times their forward profit estimates, below the industry average multiple of 7.16.
United Airlines, which also saw a premarket decline of 1.7%, reaffirmed its second-quarter earnings forecast of $3.75 to $4.25 per share on Tuesday.
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