American Airlines is set to release its financial results for the third quarter of 2021 next week. However, the carrier published guidance on Tuesday that indicates things are getting better for the airline. It has seen strong improvements in the third quarter, but it is not yet out of the woods. The next quarter and beyond will be critical in that regard, but some tailwinds could push American back to organic profitability as the recovery continues.
American Airlines updates its third-quarter guidance
The third quarter stretched from July 1st through September 30th, and it was a strong one for the airline. July and August are two of the best months for travel for airlines, largely given the strong boost in leisure travel with schools out for the summer. Warm weather across much of the US also boosts traffic to destinations like coastal Maine, Yellowstone, and Glacier National Park. This year, that trend held true.
As far as capacity goes, the carrier recorded a 19.4% decline in capacity compared to the third quarter of 2019, which was at the lower end of the predicted 15-20% decline. However, it saw its best September operationally in its history since the merger. The carrier notched a 99% completion factor, with 76.6% of flights departing on time and 86.2% of flights arriving on time. American expects positive trends to continue in October.
Revenue is expected to be down around 25% compared to the third quarter of 2019. American previously forecast a 24-28% decline in revenue. Looking at unit costs, measured by cost per available seat mile (CASM), American expects it to be up 10-11% compared to the third quarter of 2019, due primarily to lower capacity without a comparable decline in costs.
All this leads to a pretax margin that is positive when considering special credits like government support. Excluding that support, the carrier expects a net pretax margin of -9 to -10%, which is better than the previous guidance of -10 to -14%. In raw numbers, the airline expects a net profit considering government support, but a net loss between $620 million and $675 million excluding government support.
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Not out of the woods yet
In the second quarter, American recorded a net loss of $1.1 billion, excluding the impact of government support. The carrier recorded $1.4 billion in special credits, most of which was government support, that propelled it to a positive net profit, though slim, of $19 million. This quarter, that net income is expected to come in the range of $135 to $190 million.
While a range of a net loss between $620 and $675 million is a significant improvement, it is not a profit for the carrier on its own. With government support now ended, the pressure is on American to get back to profitability.
This year’s Thanksgiving and December holiday periods are expected to be incredibly strong, given the rollout of vaccinations. This should help boost the carrier’s bottom line in the fourth quarter, but other structural factors are at play.
First and foremost, American can travel to more destinations. While major European centers reopened this summer, much of that travel demand could not be tapped into until the third quarter. American has run some transatlantic flights that are more seasonal in nature – like Athens – through October. Plus, major business centers like London and Frankfurt opened in the quarter, and recovery is expected to continue, especially in regions like Asia.
Other countries are also looking to reopen. Singapore is just a few days away from welcoming Americans again. Thailand is looking at a November reopening. Fiji has announced December for its timeline. Though these are not massive markets for American Airlines, they represent steps in the right direction from holdouts that could lay the groundwork for countries like Japan, South Korea, and perhaps even Australia to reconsider their timelines. These top destinations will help propel some of the return of business travel, as well.
Business travel continues its rebound, which is the key to getting revenue back up. As the recovery continues, 2022 is looking like it will be the year when American gets back in the swing of pre-crisis growth and developments.