Recasts, updates share price in paragraph 3, adds comments and details from earnings call throughout

By Rajesh Kumar Singh and Nandan Mandayam

CHICAGO, July 23 (Reuters) - American Airlines AAL.O lowered its 2026 earnings forecast on Thursday, warning that a renewed surge in jet fuel costs could leave it around breakeven this year despite record revenue, higher fares and resilient travel demand.

The carrier now expects full-year adjusted results to range from a loss of 65 cents per share to a profit of 65 cents, with breakeven at the midpoint. Its previous forecast ranged from a loss of 40 cents to a profit of $1.10. Analysts on average expected a profit of 65 cents per share, according to LSEG data.

Shares fell 7% in morning trade.

The cut underscores a broader limit facing the airline industry: strong demand and higher fares have softened the blow from the fuel shock but have not insulated earnings from volatile energy costs.

The stakes are higher at American. Its thinner margins and persistent profit gap with Delta Air Lines DAL.N and United Airlines UAL.O leave it less room to absorb the same cost increase, intensifying scrutiny of Chief Executive Robert Isom's turnaround plan.

American has been rebuilding corporate travel, adding premium seats and leaning more heavily on its loyalty program. But its unions have pressed the board over lagging profitability, with some calling for a change in leadership.

American expects year-over-year unit revenue growth in both the third and fourth quarters to exceed the pace achieved in the second quarter.

But its fuel outlook has deteriorated rapidly. Chief Financial Officer Devon May said expected fuel costs for the rest of 2026 had risen by nearly $1.6 billion since the beginning of July, including more than $700 million for the third quarter. May said American expected fuel prices to remain volatile.

Only three weeks earlier, the company had expected to forecast full-year adjusted pretax earnings approaching $1.5 billion, about four times its 2025 result, May said. The latest fuel curve sharply reduced that expectation.

American still expects stronger revenue and continued cost control to produce substantial margin expansion once fuel prices normalize. It now faces a potential $6 billion year-over-year fuel headwind for 2026.

The industry-wide impact is already measured in billions of dollars. United expects nearly $6 billion more in fuel expense than it budgeted at the start of the year, while Southwest Airlines' LUV.N second-quarter fuel expense rose by nearly $900 million.

But the effect on earnings has varied. Delta maintained its annual earnings target, while United raised the lower end of its forecast. Southwest Airlines LUV.N lowered the floor of its outlook, and Alaska Air ALK.N declined to restore full-year guidance.

The divergence shows that demand and pricing alone do not determine which carriers can withstand a fuel shock. Airlines with wider margins and larger premium, corporate and loyalty businesses have more room to absorb a sudden increase in costs without abandoning their profit targets.

American's third-quarter outlook shows the squeeze. It expects revenue to rise 16% to 19% from a year earlier but still projects an adjusted loss of 70 cents to 10 cents per share. Analysts had expected a profit of 28 cents.

The airline expects to pay an average of about $3.75 per gallon for fuel in the third quarter, which would increase its fuel expense by roughly $1.7 billion from a year earlier.

Its quarterly fuel expense increased by more than $2.2 billion, or 83% from a year ago, in the second quarter, nearly matching the roughly $2.3 billion rise in revenue.

Higher fares allowed American to recover almost half of the additional fuel expense.

American reported adjusted earnings of 15 cents per share, above analysts' estimate of 3 cents.