Are Odds In Favor Of American Airlines Stock?

AAL: American Airlines logo
American Airlines

With the progress in mass vaccination, passenger numbers at TSA checkpoints have observed a strong uptick in recent months. However, the air travel demand remains 50% below pre-Covid levels – indicating a downside risk for American Airlines (NASDAQ: AAL). After two rounds of payroll support, the U.S. government initiated a third phase as the huge salary cost head can trigger involuntary furloughs. While government support programs have buoyed investor sentiments and pushed airline stocks higher, American Airlines’ low net margins due to sizable interest expenses are likely to impact long-term shareholder returns. Notably, the PSP-3 requirements include suspension of dividends and share repurchases until September 2022. Given the tepid air travel demand and a slow macroeconomic recovery, Trefis believes that AAL stock is a risky bet at current levels. We highlight the historical trends in the company’s revenues, margins, and valuation multiple in an interactive dashboard analysis, American Airlines Valuation.

Second quarter expectations highlight the lull in air travel business

Per Q1 earnings release, the company expects its second-quarter revenues to observe a 40% contraction from pre-Covid levels (Q2 2019). Growth in passenger figures led to a guidance revision by American’s peers including United and Delta with an expectation of positive cash generation during the latter half of the year. However, the resurgence in coronavirus cases in various countries continues to impact international and business travel demand. Also, the third round of payroll support indicates that the lull in air travel business is likely to remain this year. The company will receive $3.3 billion of aid under the third round as opposed to $2.1 billion in the previous quarter.

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Government support has offset huge fixed costs in the past four quarters

In 2020, American Airlines reported $17 billion of total revenues and $6.5 billion of operating cash outflow – assisted by the $6 billion of PSP-1. Subsequently, the company’s reported $4 billion of revenues in Q1 2021 and operating cash turned positive to $174 million due to $2.1 billion of PSP-2. Thus, government aid has been a key factor offsetting AAL’s salary-related expenses (salary and wages are 30% of total revenues). Moreover, the $1 billion of annual interest expenses weighed on the company’s net margins even before the pandemic and are expected to impact the balance sheet de-leveraging prospects in the coming years.

Is there a better investment over American Airlines? American Airlines Stock Comparison With Peers summarizes how AAL compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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