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American Airlines just signaled a harsh reality for the US economy

american airlines
american airlines

(AP/LM Otero)

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 percent.

"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 is a sign of a weakening global economy or, at the least, a sign that growing concern the global economy is headed that way. Britain's historic vote to leave the EU, is 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 President Scott Kirby said during the earnings call.

Although Kirby's statement was made in reference to the fears surrounding Brexit, the sentiment 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 about the economy. As a result, softness in airline revenues and a decline in demand for air travel can be seen as a bellwether for looming economic issues.

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

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

The airline was expected to have the first of the planes delivered next spring. Instead, it will delay their arrival until late 2018. The order for the A350s, at $308 million each based on 2016 list prices, was placed by US Airways in 2007 prior to its merger with American.

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