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Why American Airlines Stock Popped 5.4%

By Rich Smith – Nov 7, 2018 at 12:35PM

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Sagging oil prices could boost AA's profits.

What happened

American Airlines (AAL 3.91%) stock is up 5.4% as of 12:50 p.m. EST -- apparently on no news whatsoever. What's behind the surging stock price?

I have a hunch: It's oil prices.

An American Airlines plane parked under a blue sky.

AA's profits have been grounded for some time now, but could gain altitude in Q4 -- if oil prices permit. Image source: Getty Images.

So what

Government reports show that domestic oil supplies rose for the seventh week in a row today, with gasoline stockpiles also rising. The news put continued pressure on oil prices, with U.S. benchmark West Texas Intermediate crude falling 1.1% to $61.53 per barrel in early trading Wednesday.

Now here's why this is important to American Airlines. Last month, American Airlines reported subpar earnings -- which it blamed on a 37.6% increase in the average cost of jet-fuel bought for its airplanes. Although the company isn't yet losing money -- its CEO has famously promised investors that his company will never lose money again -- the higher oil prices go, the more at-risk that promise becomes.

The fact that oil prices appear to have hit a ceiling and rebounded lower is therefore good news for American Airlines.

Now what

Analysts who follow the company expect American Airlines to resume growing earnings this quarter, projecting $1.03 per share in profits, up from $0.95 in last year's Q4. With fuel prices moderating, the chances American Airlines will meet (or beat) that consensus estimate have markedly increased.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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