AAL shares descend 7% as promotional activity hits profitability

American Airlines (AAL) reported mixed Q2 results, slightly surpassing EPS expectations but falling short on revenue. The company posted adjusted EPS of $1.09, beating the analyst estimate of $1.05, but this was a significant drop from $1.92 year-over-year. Adjusted net income was $774 million, down 44% year-over-year but above the estimate of $746.7 million. Operating revenue rose by 2% to $14.33 billion, slightly missing the $14.35 billion estimate. Passenger revenue was $13.20 billion, a 1.7% increase year-over-year, close to the estimated $13.21 billion.

Guidance was notably revised downwards, painting a bleak picture for the year. American Airlines slashed its full-year adjusted EPS forecast to between $0.70 and $1.30, down from the previous range of $2.25 to $3.25. The company expects a $1.5 billion impact from strategic missteps. CFO Devon May expressed confidence in closing the margin gap with peers and achieving long-term financial targets despite the revised outlook. The forecasted delivery of new mainline aircraft this year was also reduced to 20 from the previous estimate of 22.

Pricing and expenses remained key areas of concern. The company reported a 6.2% decline in passenger yield and a 5.9% drop in passenger revenue per available seat mile (PRASM). Cost per available seat mile (CASM) excluding fuel saw a slight decrease of 0.2%, while overall CASM increased by 0.8%. The company has been lowering prices to fill planes, a strategy that appears to have backfired, putting significant pressure on margins. Operating margin was down from the previous year, reflecting the impact of aggressive discounting.

American Airlines' CEO Robert Isom highlighted the challenges faced in the second quarter due to the company’s prior sales and distribution strategy, which did not meet expectations. He acknowledged the imbalance of domestic supply and demand and the impact on revenue and margins. Shares dropped 7.4% in premarket trading following the disappointing earnings report and guidance cut. The company has faced criticism for its aggressive discounting strategy, which has hurt profitability.

Looking forward, American Airlines is taking steps to address the fallout from its previous strategy. The company is renegotiating contracts with corporate customers and travel agencies, reinstating competitive fares, and increasing sales support. CEO Isom promised a reset after firing the chief commercial officer who spearheaded the flawed strategy. Despite these efforts, the company expects continued revenue and earnings impact throughout the year.

Operationally, American Airlines reported an 8% increase in available seat miles and an 8.5% rise in revenue passenger miles. The load factor improved slightly to 86.6%. The company now expects to break even in the current quarter but remains cautious about the overall market environment. The strategic shift to restore relationships with corporate clients and travel agencies is expected to take time to show results.

In summary, American Airlines' Q2 earnings reflect significant challenges and strategic missteps that have impacted profitability and led to a major downgrade in full-year guidance. While the company is making efforts to correct its course, the road ahead remains uncertain with continued pressure on margins and profitability expected. The company's renewed focus on corporate relationships and optimized pricing strategies will be crucial in regaining stability and improving financial performance.