American Airlines profit margin forecast disappoints

(Reuters) - American Airlines Group Inc AAL.O shares dipped on Thursday after the carrier said cheap airfares and higher wages will squeeze profits in the current quarter.

American Airlines aircraft are parked at Ronald Reagan Washington National Airport in Washington, U.S., August 8, 2016. REUTERS/Joshua Roberts

American, the world’s largest airline, said it expects its adjusted pretax margin to fall in the fourth quarter.

Late on Thursday afternoon, the airline’s shares were down 0.5 percent at $40.59, after falling as much as 3 percent.

The company reported that net income fell by more than half in the third quarter from a year ago to $737 million, or $1.40 per share, partly as the result of $452 million provision for income taxes. The company nonetheless beat analysts’ average estimate, according to Thomson Reuters I/B/E/S.

J.P. Morgan analyst Jamie Baker said the airline’s 4 percent to 6 percent margin, excluding items, would put the company at the bottom of the industry.

Fort Worth, Texas-based American said a weaker British pound has dampened sales to British travelers in dollar terms.

At the same time, budget carriers such as Norwegian Air Shuttle ASA NWC.OL are fighting larger airlines for a fixed number of travelers to Europe - charging less per ticket and hurting American's revenue.

American forecast that unit revenue, which compares sales to how many seats the airline flies and how far it flies them, will decline between 1 percent and 3 percent in the fourth quarter from the year prior.

New labor contracts are increasing costs as well. Deals with the airline’s reservation agents, dispatchers and mechanics will help push unit costs up between 8 percent and 10 percent in the fourth quarter from a year ago, excluding fuel and other charges. Not included are costs associated with flights contracted out to regional airlines.

American pointed to some bright spots. Revenue from Latin America had improved and company officials said they expect that to continue.

Through 2017, the group said it will be able to eliminate a number of redundant positions resulted from its 2013 merger with US Airways, through attrition by early retirement and buyouts, rather than layoffs.

Reporting by Rachit Vats in Bengaluru; Editing by Ted Kerr and Steve Orlofsky