Last week, Delta Air Lines (DAL 1.25%) bumped up its unit revenue forecast for the first quarter of 2018. It expects to report a 5% year-over-year increase in revenue per available seat mile (RASM) when it releases its first-quarter earnings report this Thursday. That's up from its initial guidance for a 2.5% to 4.5% increase and its March forecast of 4% to 5% RASM growth.

This week, United Continental (UAL -0.06%) and American Airlines (AAL 0.14%) published their own first-quarter investor updates. Both carriers also raised their unit revenue forecasts. Nevertheless, investors weren't impressed -- and sent shares of United and American lower, even as the broader market rallied.

AAL Chart

American Airlines vs. United Continental Stock Performance, data by YCharts.

United raises its guidance again

Back in January, United Continental projected that its profit margin would contract yet again in the first quarter, leading to a breakeven performance. While the first quarter is seasonally weak for most airlines (including United), this forecast still didn't inspire much confidence in United's turnaround strategy.

However, in March, United Continental increased its guidance for passenger revenue per available seat mile, calling for a 1% to 3% increase (compared to its original forecast of 0% to 2% growth). This opened up the possibility of earning a small profit in the first quarter, with an adjusted pre-tax margin of 0% to 2%.

On Monday, United raised its guidance again. The carrier estimates that passenger unit revenue rose 2.7% last quarter -- near the high end of its updated guidance range -- and that its adjusted pre-tax margin will come in near 2% for the first quarter. That would be down just slightly from 2.4% a year earlier.

American Airlines also tweaks its guidance, but investors wanted more

American Airlines' initial first-quarter guidance wasn't much better than United's. It projected that RASM would rise 2% to 4% year over year, offset by a roughly 4% rise in non-fuel unit costs. As a result, the company forecast that its pre-tax margin would be in the range of 2% to 4%.

An American Airlines plane in flight, with mountains in the background

American Airlines' initial first-quarter margin forecast was uninspiring. Image source: American Airlines.

Coming into this week, American Airlines hadn't updated its first-quarter guidance. Given that Delta and United had already raised their forecasts in March -- before raising them again this month -- many investors were expecting a big improvement in American's unit revenue outlook.

Instead, American merely narrowed its existing revenue guidance to the upper half of the range it gave in January. RASM rose roughly 3% to 4% in the first quarter. However, the company did increase its pre-tax margin guidance for the quarter to 4% to 5%, driven partially by a shift in the timing of some expenses from the first quarter to the second quarter.

Investors should stay cautious

American Airlines reaffirmed its full-year adjusted EPS forecast of $5.50 to $6.50 in its investor update this week. United reiterated its target of $6.50 to $8.50 at an investor conference last month. Based on the midpoints of those ranges, American Airlines stock trades for just eight times forward earnings, while United shares trade for nine times forward earnings.

This suggests that there could be big upside for investors if American Airlines and United Continental can successfully execute their strategic initiatives. However, investors shouldn't get greedy, here.

Most importantly, both companies still have much lower pre-tax margins than Delta Air Lines, which expects to report a pre-tax margin of 6.5% to 7.5% for the first quarter. There's no sign that either American or United will be able to close this margin gap. Weak profit margins can lead to substantial earnings volatility, justifying low earnings multiples.

Additionally, while the industry's first-quarter revenue results were promising, it's still not clear if higher industry capacity growth will undermine unit revenue this year. For example, United is planning for full-year capacity growth of 4% to 6%: well ahead of its 3.6% Q1 capacity increase. In other words, airlines still haven't felt the brunt of United's aggressive growth plan.

Keeping unit revenue moving higher is very important, given that oil prices have been rising. Investors should wait for further evidence that American Airlines and United Continental can grow (or at least maintain) their earnings power before investing in either company.