American Airlines' earnings are a sign of problems in the economy

American Airlines shares are rising after it reported second-quarter earnings that beat Wall Street’s targets.
But behind the Wall Street consensus are warning signs, and not just about the airline industry.
At American, profits fell even though the airline managed to cut fuel costs — a major expense — by one-fifth. Overall operating revenue is down, while the average airfare paid fell 6.4% and load factor — a measure of how full flights are — dropped one half per cent.

“Second quarter 2016 revenue was hurt by competitive capacity growth, continued global macroeconomic softness and foreign currency weakness,” the carrier wrote in its earnings report.

Earlier this week, United and Southwest both reported similar revenue pressures.

Soft consumers

Reduction in spending on the part of the airline and the consumers are signs of a weakening global economy or, at the least, signs that there is growing concern the global economy is headed that way. Britain’s historic vote to leave the EU, is of course one reason.

“We have seen historically that if there is a business confidence problem, the first thing businesses do is cut entertainment and travel budgets,” American Airlines Scott Kirby said during the earnings call.

Although Kirby’s statement was made in reference to the fears surrounding Brexit, the sentiments expressed is indicative of broader decision making in the economy. In fact, for everyday consumers, air travel is also one of the first budgetary items to be cut when there is concern over the economy. As a result, softness in airline revenues and a decline in demand for air travel can be seen as a bell weather for looming economic issues.

And with the growing strength of the US dollar relative to other currencies, there is now a pronounced competitive disadvantage for US carriers that compete for foreign business.

This is starting to impact other companies, of course. American cut $1.2 billion in expected capital expenditures over the two years by deferring delivery of 22 Airbus A350-900 airliners.

The airline was expected to take delivery of the first of the planes next spring. Instead, it will delay its arrival until late 2018. Valued at $308 million a piece based on 2016 list prices, the A350 order was placed by US Airways in 2007 prior to its merger with American.

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