Is This Airline Stock A Better Pick Over American Airlines?

AAL: American Airlines logo
American Airlines

The shares of American Airlines (NASDAQ: AAL) currently trade 35% below pre-Covid levels as compared to a 44% decline in United Airlines stock (NASDAQ: UAL). United Airlines incurred $4.1 billion of operating cash burn last year which is lower than its $11 billion drop in market capitalization since February 2020. Comparing this with American Airlines’ $7.2 billion decline in market capitalization and $6.5 billion of operating cash burn, Trefis believes that United Airlines stock is a good value investment. Also, the third phase of the payroll support program restricts airline companies from returning capital to investors as dividends and share repurchases until September 2022. We compare the historical trends in revenues, margins, and valuation multiple of both companies in an interactive dashboard analysis, American Airlines vs United Airlines: Industry Peers; Which Stock Is A Better Bet?– parts of which are highlighted below.

  1. Revenue Growth

United’s growth was a bit higher than American’s before the pandemic, with United’s revenue expanding at an average rate of 5.8% per year from $36.6 billion in 2016 to $43.3 billion in 2019, versus American’s revenue which grew by 4.5% per year from $40 billion in 2016 to $45 billion in 2019. With the pandemic causing a severe downturn in the travel & tourism industry, both companies reported a 60% (y-o-y) top-line contraction in 2020.

  • To match demand-supply and lower operating losses, United and American lowered capacity in 2020 (available seat miles) by 57% and 50%, respectively. Thus, lower cash generation from reduced capacity and occupancy rate prompted the need for government aid to assist maintenance costs and employee salaries.
  • Per PSP-3 requirements, dividend payouts and share buybacks remain suspended until September 2022 as the airline industry continues to face hiccups from multiple waves of coronavirus infections.
  • United and American’s topline has been majorly driven by domestic demand in the past few years. In 2019, domestic business accounted for 74% and 62% of United and American’s total revenues, respectively.
  • Both companies reported strong revenue growth this year, assisted by domestic travel demand and a decline in new infections after the fourth wave (due to Delta variant). (related: Southwest Airlines Stock Poised For Strong Gains?)

  1. Returns (Profits)
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Coming to Returns, United has been reporting a slightly higher operating margin than American.

  • In 2019, United Airlines reported $43 billion in revenues, $3 billion of net income – at a net margin of 7%. Similarly, American Airlines reported $46 billion in revenues, $1.6 billion of net income – at a net margin of 4%.
  • American sizably low net margins have largely been due to $1 billion of annual interest expense on the $20 billion of long-term debt.
  • Moreover, American’s highly leveraged balance sheet led to an operating cash burn of $6.5 billion as compared to $4.1 billion for United Airlines.
  1. Risk

American Airlines looks like the riskier of the two companies from the perspective of financial leverage.

  • High fixed costs and significantly low demand took a heavy toll on all air carriers over the past two years. With the culmination of the CARES Act grant, the airline industry faces downside risk from recurring travel restrictions due to multiple infectious waves. Thus, revenue contraction coupled with a loaded balance sheet negatively affects shareholder returns.
  • As dividends and share repurchases stand suspended until September 2022, profiting from short-term dips remains a rational investment strategy for airline stocks.
  • United and American ended Q3 2021 with $14 billion and $24 billion of long-term debt (net of cash & cash equivalents), respectively.
  • Given United Airlines’ stronger balance sheet, we believe that the stock is a better pick over American Airlines. (related: American Airlines Stock To Tread Water?)

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 Returns Dec 2021
MTD [1]
YTD [1]
Total [2]
 AAL Return -7% 16% -61%
 S&P 500 Return 0% 25% 109%
 Trefis MS Portfolio Return 1% 46% 293%

[1] Month-to-date and year-to-date as of 12/23/2021
[2] Cumulative total returns since 2017

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