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3 Reasons American Airlines Stock Could Fall

By Dan Caplinger – Mar 6, 2016 at 9:11AM

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The airline industry has done well for a long time, but could bad times be coming?


Image: American Airlines.

It's hard to believe that it was only a little more than two years ago that American Airlines Group (AAL 2.24%) come out of bankruptcy. Since then, the airline's merger with US Airways has resulted in substantial integration of the two formerly separate operations, and the company now leads Delta Air Lines (DAL 2.19%) and other carriers as the largest airline in the world. Yet after seeing its stock soar in the year following its reemergence, American Airlines stock has fallen back over the past year or so, and investors are increasingly concerned about whether the industry as a whole can keep climbing. Let's look at three reasons American Airlines stock could fall from here.

Passenger revenue metrics might not improve
Part of the trouble that American Airlines has faced lately comes from poor results in its internal operational metrics. In particular, one key element of airline success is measured through passenger revenue per available seat mile, which incorporates fare levels, flight distance, carrying capacity, and load factors. American saw this metric drop 5.4% in 2015 compared to 2014. In large part, the airline blamed more intense competition from Southwest Airlines (LUV 1.76%) in key markets like Dallas as well as the strong dollar and its impact on foreign-currency revenues. Weak Latin American economies in countries such as Brazil and Venezuela also contributed to weak results.

American Airlines argues that its passenger revenue metrics should rebound in the near run. A change to its frequent flyer program should result in fewer award flights, and efforts to differentiate further economy-class fares to accommodate bargain-shopping travelers should result in greater loads. Yet all of these factors rely on the U.S. economy holding up, and with global economic trends continuing to be troublesome, it's far from a sure thing that American Airlines will keep seeing the benefit of solid underlying macroeconomic growth in its key markets.

Fuel costs have nowhere to go but up
A big part of the income growth that American Airlines has seen recently has come from falling jet fuel prices. For the full 2015 year, costs for fuel and related taxes plunged 41% to $6.23 billion, and that saved American about $4.37 billion compared to 2014. To put that number into perspective, American Airlines' entire pre-tax operating income was $6.2 billion, and so fuel savings made about 70% of that figure in 2015.

So far, energy prices have fallen further, which could actually help American in 2016. More recently, though, some commodity prices have finally shown signs of regaining their lost luster, and that could just as easily push those fuel costs back upward. If fuel prices don't stay low, then it could put further pressure on American Airlines stock throughout the year.

Zika virus and the Rio Olympics
For a long time, investors in American Airlines have looked forward to the 2016 Summer Olympics in Rio de Janeiro. Having the Olympics in Brazil should be a boon for American, because the airline has a special relationship with the South American nation and its region-leading economy. American made a big deal of its exposure to Brazil when the country hosted the 2014 FIFA World Cup, boasting service to nine of the 12 destinations hosting the soccer tournament.

The risk involved with the Rio Olympics, however, is that attendance won't be as robust as many had hoped. The Zika virus has affected a reported 1.5 million Brazilians, and the danger of brain damage in babies of women who catch the virus while pregnant has created a lot of fear surrounding the disease. Athletes and spectators alike could well choose to avoid the Olympics if Brazil can't demonstrate that it has contained the outbreak, and last month, the U.S. Olympic Committee specifically advised sports federations that athletes and staff who are concerned about their health should consider skipping the event.

If travel to the Olympics suffers because of Zika, then American Airlines could be among the hardest hit. Unlike Southwest and its limited international exposure, American stands to gain or lose the most depending on what happens in Rio.

Overall, American Airlines has given shareholders a superb performance since emerging from bankruptcy. If these issues go wrong, though, then American's stock could reverse its recent gains.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has the following options: long January 2017 $35 calls on American Airlines Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Southwest Airlines Stock Quote
Southwest Airlines
LUV
$39.25 (1.76%) $0.68
Delta Air Lines Stock Quote
Delta Air Lines
DAL
$34.61 (2.19%) $0.74
American Airlines Group Stock Quote
American Airlines Group
AAL
$14.14 (2.24%) $0.31

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