American Airlines and Southwest Earnings Preview: What may happen Thursday

Expectations are high after United Airlines beat third quarter estimates last week

• Two of the biggest U.S. airline operators, American Airlines and Southwest, are due to report quarterly earnings Thursday.
• Airlines have outperformed the market recently amid economic resiliencies.
• United Airlines beat expectations last week, setting the bar high for competitors.

Two of the biggest U.S. airline operators, American Airlines (AAL) and Southwest (LUV), are due to report quarterly earnings before the market open on Thursday.

Expectations are high after United Airlines (UAL) beat third quarter estimates last week. UAL rose 13% after posting earnings, contributing to broader enthusiasm in the sector. The US Global Jets ETF (JETS) is up nearly 9% since the beginning of October, with some help also coming from a rally in Spirit Airlines (SAVE).

American Airlines: What do investors expect?

Analysts expect American Airlines to post earnings per share (EPS) of $0.16 on $13.50 billion in revenue, according to TradingView. That would be down from an EPS of $0.38 on $13.48 billion a year ago, and down from an EPS of $1.09 last quarter, although revenue would be lower than the second quarter’s $14.33 billion.

Last quarter, AAL cut its full-year guidance, which sent the stock price to a fresh yearly low in the weeks following the report. Since August, the stock has rallied over 40%, helped by a resilient U.S. economy and growing travel demand.

Operating margins are in focus for investors Thursday. The company is guiding for an adjusted margin of 2% to 4% this quarter, which would be down from nearly 10% a year ago. That said, if AAL hits the top end or beats that range, it could strengthen the stock’s tailwinds.

Southwest: Will the stock hold up amid declining earnings?

Southwest is resolving a dispute with activist investor Elliott Investment Management after negotiating a possible settlement. The battle to avoid a proxy fight led Southwest to change several policies, including offering paid assigned seating as well as premium offerings for seats that include extra leg room.

LUV stock is up about 6.5% on a year-to-date basis, tracking for its first yearly gain since 2019. LUV is up about 27% over the past 52 weeks. There is reason for optimism into the end of the year. Insider Rakesh Gangwal bought $107 million in company stock recently, according to filings with the Securities and Exchange Commission (SEC). Gangwal was appointed to the Southwest board back in July.

Analysts expect LUV to report EPS of $0.06 on $6.77 billion in revenue. That would be down from $0.38 a year ago, although revenue would rise slightly from $6.53 billion. The expected year-over-year decline in earnings even when accounting for higher revenue shows the challenges facing budget carriers in the post-COVID landscape. That said, management will likely be pressed on how and when they plan to initiate changes to policies and get the company back on track.

UAL and LUV: Trading the earnings

The options market is pricing in a +/- 0.70 point move for American Airlines, which equates to a 5.4% move in the stock price. Additionally, the stock is trading with an implied volatility rank (IVR) of 77.7, meaning volatility is elevated relative to the past 12 months of trading.

Southwest shows an expected move of +/- 1.20 points or 4% of yesterday’s stock price. The smaller expected move is reflected in its IVR of 39.9, meaning it is trading with less volatility compared with the previous 12 months.

Thus, options traders who are looking to sell premium might opt to go with a play on UAL versus LUV, as the former offers a better bang for your buck.

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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