AAL

Why American Airlines and Southwest Are Flying Lower Today

American Airlines Group (NASDAQ: AAL) slashed quarterly estimates and announced the departure of its chief commercial officer, a sign of softening demand and a change of strategy.

Shares of American were down 14% as of 1 p.m. ET, and the news is taking other airlines along for the ride. Shares of Southwest Airlines (NYSE: LUV) were down as much as 7% on Wednesday and traded down 5% as of 1 p.m. ET.

Weakening demand and a change in strategy

Airline investors have flown through a lot of turbulence in recent years. The industry was hit hard by the pandemic but enjoyed significant bounce-back demand once vaccines hit the market. The question for the last year has been whether that demand was sustainable, especially in the face of higher interest rates and fears of a weakening economy.

American provided its answers in a Tuesday night regulatory filing. The company cut its second-quarter earnings view to $1 to $1.15 per share, from a previously announced $1.15 to $1.45 per share, and trimmed its operating margin guidance by 1% due to softening demand.

The news should not have come as a total surprise, as Frontier Group Holdings made similar comments about demand earlier in the month.

But American also announced that Vasu Raja, who has served as chief commercial officer since April 2022, is stepping down, with no immediate replacement named. That suggests a change in strategy could be on the horizon, which could delay any turnaround.

Southwest and other airlines were in the red as well, as investors believe the demand softening that American is seeing is not unique to that airline. Southwest investors are particularly skittish right now following the company's March warning that 2024 would be a challenging year.

Are airline stocks a buy?

There have been questions swirling about Raja for months now, following an American strategy presentation to Wall Street that was poorly received. Vice chair and chief strategy officer Stephen Johnson will lead the commercial office for now while a search is underway for a permanent replacement.

American needs a reboot, and that will take time. Like Southwest, it is also scrambling to rethink flying plans due to ongoing issues at Boeing, which are causing delivery delays.

The good news for investors is that these airlines are healthy enough to survive a downturn, and so whatever is going on with demand post-summer, the carriers should be able to fly through it. But given the uncertainty about future demand and the company-specific problems at both American and Southwest, there is no reason for investors to buy in today.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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