American Airlines on Thursday reported a fourth straight quarterly gain in unit revenue despite thousands of hurricane-related flight cancellations but its stock dropped more than 4%, apparently reflecting investors’ concern over rising expenses.
For the third quarter, American’s total revenue rose 2.7% to $10.9 billion while total revenue per available seat mile (TRASM) or unit revenue, a key industry metric, increased 1.1%.
The unit revenue gain came even though the recent hurricanes forced the cancellation of 8,000 American flights in the third quarter, reducing earnings by $75 million. The impact of the weather was offset by an unexpected increase in average far per mile.
Adjusted earnings per share for the quarter fell to $1.42 a share but that beat analysts’ estimates of $1.40 a share amid higher demand for business and leisure travel.
“Despite the significant operational challenges posed by three hurricanes, our team delivered solid financial results,” American CEO Doug Parker said in a news release.
But in trading Thursday, American’s shares declined 4.7% to $48.61.
“The airline’s third-quarter operating expenses swelled by 5.3 percent to $9.6 billion, a sore spot for investors,” Reuters noted. “Increasing costs for fuel and labor have caused expenses to spike across the industry.”
Fuel expenses rose 13.3% and salaries and benefits jumped 8.0%. Earlier this year, American said it offered an unexpected mid-contract pay increase to its pilots and flight attendants, which will cost an additional $230 million for 2017 and $350 million for 2018 and 2019.
The third quarter featured American’s rollout of its no-frills basic economy product, which in exchange for giving up certain perks like seat selection gives passengers a lower fare. “Initial results of this new product’s rollout continue to be consistent with management’s expectations,” the company said.
American is predicting fourth-quarter unit revenue will increase approximately 2.5% to 4.5% year-over-year. “The outlook calls for an improving revenue environment,” Helane Becker, a Cowen & Co. analyst, said in a note. “Management has consistently said they expect sequential improvement in unit revenue from 3Q17, while investors were skeptical.”