What happened
Shares of American Airlines Group (AAL 6.60%) fell more than 6% on Wednesday after a rival warned that costs were coming in higher than expected. American is widely viewed as the most vulnerable of the major U.S. airlines, and investors have recently been heading for the emergency exits at the first sign of trouble.
So what
Before markets opened on Wednesday, American rival Delta Air Lines (DAL 2.86%) warned that third-quarter non-fuel costs would be up 2.5% year over year -- an increase from initial guidance for a 1% to 2% gain -- due to higher employee costs, weather, and record passenger volumes. Delta also said it now expects full-year 2019 non-fuel costs to be up 2%, versus a previous forecast for a rise of about 1%.
Image source: American Airlines Group.
Though Delta's news didn't directly impact American, the latter airline has given investors plenty of reasons to be concerned. American is carrying more debt than its peers, and faces labor unrest from its mechanics and other employees.
Airline Debt to Assets (Quarterly) data by YCharts.
It was also relying on Boeing's troubled 737 MAX for growth, and could face additional issues from that plane's grounding. Reuters reported on Tuesday that American's pilots would seek compensation for pay lost to canceled 737 flights.
The pilot request could either inflate costs at American, or put the airline at risk of inflaming tensions with another important labor group.
Now what
American does have disadvantages compared to some of its key rivals, and given the airline industry's history of destroying equity value during downturns, it's understandable that investors are getting nervous about the company. But American is far from a lost cause.
The airline is well-positioned to weather the ongoing U.S.-China trade dispute thanks to cutbacks announced last year, and it's in the early stages of implementing changes to its route network and pricing strategies designed to improve profitability. American is also forecasting that capital expenditures will come down in the next few years, which should free up cash to accelerate debt repayment.
Given the overall uncertainty of the economy and American's near-term disadvantages, now isn't an ideal time to climb on board, especially with better buys like Delta also trading down. But over the long run, American seems likely to navigate through these storm clouds.
