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Good news for US airlines on unit revenue

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Will American Airlines win the race to positive unit revenue growth?

As discussed in this space previously, declining year-over-year unit revenue, quarter after quarter, has been the one big negative mark for US airlines in an otherwise extremely positive period of financial performance. American and rivals Delta Air Lines and United Airlines have pledged low capacity growth next year in an effort to return to positive unit revenue growth—which American and Delta had been targeting for the first half of 2017. Delta, which has posted negative unit revenue growth for seven straight quarters, has been pushing to be the first major US carrier to return to positive year-over-year unit revenue growth for a full quarter.

But fresh guidance released by American Dec. 9 indicates that airline could achieve positive unit revenue growth in the current quarter. American now expects its fourth quarter 2016 RASM to range from down 1% to up 1% year-over-year. Prior guidance was for negative unit revenue growth of between 2.5% and 0.5%. The change in guidance is “primarily [because of] improving yields, offset in part by higher estimated fuel prices,” American said. (That implies American’s unit revenue would almost definitely be positive in the quarter were it not for rising oil prices.)

American’s RASM was down 2.2% year-over-year in the third quarter to 14.73 cents, but the airline noted that RASM was up year-over-year for the month of September, marking the first month of positive unit revenue growth for American since November 2014.

United also on Dec. 9 provided new guidance for an improved unit revenue performance, though it still expects a fourth-quarter decline. United now expects a fourth-quarter year-over-year decline of 4% to 3%, up from October guidance of a 6% to 5.5% decline.

As of this writing, Delta had not issued new RASM guidance, but it will hold an investors’ day Dec. 15, when it is likely to provide updated information on its unit revenue performance and expectations. Given what American and United are saying, expect positive news from Delta too.

The stock performance of US airlines has lagged over the last couple of years primarily because of Wall Street’s concern about carriers’ unit revenue performance. But airline stocks have ticked up since Warren Buffett’s Berkshire Hathaway announced in November that it is investing more than $1 billion in American, Delta, United and Southwest Airlines. The unit revenue news should provide more momentum for US airline stocks. Perhaps that Buffett fellow is on to something.

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