Why American Airlines' Earnings Beat Didn't Give It Any Lift

American Airlines (AAL -1.00%) has reported on its second quarter, and there was plenty for investors to smile about. Profit was higher than expected, passenger traffic is up, and management at the world's largest airline raised the low end of its full-year guidance range.

But the share price slipped, and in this segment of the MarketFoolery podcast, host Chris Hill and senior analyst Jim Mueller talk about why: The 737 Max is still grounded, and it's putting a drag on the whole airline industry. The two reflect on the outlook for American, how it and its peers are shifting their stances on Boeing, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 25, 2019.

Chris Hill: American Airlines' second quarter profits came in higher than expected. They raised guidance for the full fiscal year. That is the one-two punch we like to see. And yet the shares of American Airlines are down about 3%. That's not falling through the floor, but I'm only slightly surprised at this.

Jim Mueller: It was a good quarter. Passenger traffic was up. That's what drove all of this. And American Airlines raised the bottom end of their guidance. It was a $4-6 range, and now it's $4.50-$6.50 range per share for the full year. They reported about $12 billion in revenue. Basically matching expectations. That's up a little less than 3%. They beat EPS expectations by $0.03. Their net income level of $662 million was up almost 19% year over year. Traffic was higher. The term is passenger load factor, it's basically, how many people are in the seats of all possible seats that they have. That's 86.6%. That's up 3.8% year over year. That's really what was driving this. And then they have another metric -- well, I won't go into that. It's a little too far into the weeds. But basically, they've seen 11 straight quarters of improvement for this metric. That's pretty good. That doesn't happen very often.

But what's hurting the company, and still has a lot of uncertainty, and which might be playing into the share price drop this morning, is that 737 Max continues to be sitting on the tarmac, not doing its job of flying people around the country and around the world. The airline has 24 in its fleet, and as was supposed to get seven more this quarter. About 10% or 9% of their order book of 76. But, not being able to fly them hurt them to the tune of about $175 million in pre-tax income this quarter. That is about 17% of what they would have earned if the Max was flying. For the full year, $400 million they're not getting. And that hurts.

Hill: The story of the airline industry in 2019, I think at the end of the year, when we do our look-back show, this is going to be one of the dominant storylines of 2019, is the Boeing 737 Max. I was watching an interview this morning, Southwest Airlines also reported this morning, Southwest has more 737 Max planes in their fleet, which means they have more grounded. It's a greater impact. Gary Kelly, the CEO at Southwest, was doing a very nice job, a very polite job, of holding in his frustration, but he is clearly very frustrated. If you read a transcript, he's saying things like, "We're not happy about this," and it's been interesting to watch over the last six months CEOs like Gary Kelly and others go from, in the immediate aftermath of the second 737 Max crash, statements of support of Boeing, trust in Boeing, and they are all starting to back away. Very slowly, they're all starting to back away. And there's no reason for them to publicly negotiate with Boeing, but you have to believe that behind closed doors --

Mueller: Oh, there's loud voices, I'm sure.

Hill: [laughs] Loud voices, possibly some profanity. Essentially, as we've said for a while now, the longer this drags on, the greater the ability of airlines in the United States to say to Boeing some version of, "What are you going to do to make me stop from going over to Airbus and taking my business there?"

Mueller: Yeah, exactly. And it's going to continue for a few more months, at least. I looked up what Boeing was saying. They released earlier this week. They're saying, "We're still working with the FAA and other regulators," I got that one right. FAA. "We're still working with FAA and other regulators around the world to make sure all the certifications and the software upgrades and everything meets what everyone's asking for," and they expect to submit their final package sometime in September. Which could slip if the regulators say, "No, you need to fix this, you need to look at that," and so on. It just pushes it further out in the year. And they're saying they might be able to get the grounding lifted as early as early calendar Q4 this year, which puts it in October, November range. That means many more months -- three, four, five more months -- of airlines losing money by not being able to fly those planes.

Hill: The good news for airlines, I guess, is that not a lot of people travel in November and December.

Mueller: [laughs] Yeah. Right.