American, Southwest cast pall on sentiment; US airlines sink

Bloomberg

US carriers sank after American Airlines Group Inc. trimmed its profit forecast and Southwest Airlines Co. said ticket sales had slowed after its first passenger fatality.
A jump in fuel prices over the last two weeks prompted American to cut its expected earnings for this year because “it takes time to adapt,” Chief Executive Officer Doug Parker said. Southwest predicted weaker pricing power this quarter, citing a drop in bookings after the deadly accident.
The sober outlooks cast a pall on airlines, which have slipped on the stock market this year amid investor fears that United Continental Holdings Inc.’s expansion plan will spark fare wars and drag down profits. American’s report underscored the threat of rising costs. Jet fuel has climbed 21 percent since hitting its 2018 low on February 13, as benchmark oil prices have advanced.
“Pricing is weak but fuel costs are rising,” Logan Purk, an analyst at Edward Jones, said in an interview. “You can’t really offset those costs in this pricing environment.”
American tumbled 4.3 percent to $43.30 in New York after sinking as much as 10 percent for the biggest intraday decline since June 2016. The carrier fell the most on a Standard & Poor’s index of major US carriers, which dropped 2.6 percent. Southwest fell 3 percent.
In a statement, American said adjusted earnings would be $5 to $6 a share this year because of the drag from fuel. That was 50 cents lower than the previous forecast.

‘Near-Term Problem’
“Fuel prices have risen very quickly,” Parker said on a conference call with analysts after the Fort Worth, Texas-based company reported earnings. “I view that as a near-term problem. It’s one the industry can handle over time, but it doesn’t happen immediately.”
If fuel prices remain at current levels or increase more, fares will probably trend up over time, Parker said. American estimated it will pay $2 billion more for fuel this year from the higher prices alone.
American’s first-quarter adjusted earnings fell to 75 cents a share. Analysts had expected 72 cents, according to the average of estimates compiled by Bloomberg. Revenue climbed 5.9 percent to $10.4 billion, in line with Wall Street expectations.

Southwest Accident
At Southwest, first-quarter profit climbed to 75 cents a share, a penny more than analysts anticipated. Revenue increased 1.9 percent to $4.9 billion, while analysts expected $5 billion. A reduction in its federal income tax rate “significantly” increased first-quarter net income, Southwest said.
Revenue for each seat flown a mile, a proxy for pricing power, will drop as much as 3 percent this quarter, Southwest said.
The Dallas-based carrier blamed as much as two percentage points of the decline on weak sales, after an accident in which an engine exploded in flight on April 17, piercing the plane and
killing a passenger. Southwest set the value of the lost bookings at $50 million to $100 million.

No cracks found in latest engine safety checks: Southwest
Bloomberg

Southwest Airlines Co. in recent days hasn’t found any additional signs of the metal fatigue on jet engine fan blades that led to last week’s fatal accident, though an executive said one cracked blade was discovered during reviews last year.
“With the inspections we have stepped up since last week, we have had no findings at this point, which is obviously what we would expect,” Chief Executive Officer Gary Kelly said in a quarterly earnings call with analysts.
Southwest has now inspected all but about 10,000 of the 35,500 fan blades in its fleet used on the same engine model that failed, COO Mike Van de Ven said. The reviews began last year, with about 17,000 finished before the accident occurred. Examinations were stepped up after the April 17 fatal incident. The carrier found one cracked blade, which was discarded and replaced, in its earlier inspections of the CFM56-7B engines, Kelly said.