A year ago, American Airlines' (NASDAQ:AAL) management predicted that the company's adjusted earnings per share would rise to between $5.50 and $7.50 in 2019. It was an aggressive forecast, considering that adjusted EPS totaled just $4.55 in 2018. However, with fuel prices having fallen significantly in the last few months of 2018 and various other margin improvement drivers scheduled to ramp up during 2019, the guidance wasn't totally unrealistic, either.
Unfortunately, the grounding of Boeing's (NYSE:BA) 737 MAX beginning last March dashed all hope of achieving the 2019 earnings target. Moreover, with the 737 MAX now likely to stay grounded for most of 2020, American Airlines' management doesn't expect meaningful margin improvement or EPS growth this year.
A moving target
When the Boeing 737 MAX was grounded last March, airlines initially thought it would be cleared to resume service within a few months, prior to the busy summer season. That optimistic view didn't last long. As of late April, when American Airlines held its Q1 2019 earnings call, the airline had removed the 737 MAX from its schedule through Aug. 19. Still, management expressed confidence (based on conversations with Boeing and the FAA) that the troubled jet would be recertified well before that date.
However, Boeing and global regulators gradually identified more and more issues needing to be resolved prior to recertification. This caused the timeline for recertification to slip into the fall, then into December, and -- as of a few weeks ago -- into the first quarter of 2020.
Earlier this week, Boeing acknowledged that it now expects regulators to begin recertifying the 737 MAX in mid-2020. The most recent delay is related to the aerospace giant's decision to recommend simulator training for all 737 MAX pilots. Given the lingering uncertainty over the exact timing of recertification and the time necessary to take aircraft out of storage and complete necessary crew training, this timeline almost certainly implies a return to scheduled service in the fall.
The 737 MAX crisis is grounding American's earnings
In its investor update last April -- six weeks after the 737 MAX was grounded -- American Airlines slashed its full-year EPS guidance to a range of $4 to $6. This reflected $350 million in lost operating income related to the grounding, as well as an uptick in fuel prices.
Oil prices quickly receded after peaking last April, but American's earnings forecast never recovered. To some extent, that reflected the extension of the Boeing 737 MAX grounding into 2020. The full-year tally of lost operating income from the MAX grounding was approximately $550 million. Additionally, a labor contract dispute with American's mechanics led to a spike in cancellations during the spring, costing the airline hundreds of millions of dollars.
On Thursday, American Airlines reported adjusted EPS of $1.15 for the fourth quarter, up from $0.97 a year earlier. That brought its full-year adjusted EPS to $4.90 -- up a modest 7.7% year over year. This was near the midpoint of American's most recent guidance range. However, it was a subpar result considering that the company's average fuel price fell by $0.16 per gallon in 2019.
Looking ahead to 2020, American Airlines expects the impact of the 737 MAX grounding on earnings to be similar to what it experienced in 2019. The end result is likely to be similar, too. American's initial earnings forecast for the year calls for EPS between $4 and $6, in line with the company's post-grounding 2019 outlook and its final result for the year. The average analyst EPS estimate for 2020 recently sat at $5.10.
There's still hope
Had the Boeing 737 MAX grounding not occurred, American Airlines' EPS would have been nearly $1 higher in 2019. That would have put the airline's earnings comfortably within its initial guidance range of $5.50 to $7.50, albeit near the low end of the range.
If the 737 MAX is recertified in June or July of this year as expected -- which is still a big if -- the grounding should have a minimal impact on American Airlines' results beyond 2020. That alone would provide a big earnings boost in 2021.
Additionally, the company is poised to make substantial progress toward simplifying its fleet over the next two years or so, which should help it limit unit cost growth. On the revenue side, the expansion of its operations in its highest-margin hubs (Dallas; Charlotte, North Carolina; and Washington, D.C.) is starting to pay dividends, but the earnings boost won't fully ramp up until 2021 or 2022.
Meanwhile, a sharp decline in capital expenditures should enable American to substantially reduce its debt load over the next two years. The company will also pay less for future aircraft deliveries as part of its compensation package from Boeing, contributing to lower capex going forward. There is still plenty of risk, and the airline giant has seemingly endured setback after setback in recent years, but American Airlines could finally start to hit its stride once the Boeing 737 MAX returns to service.