Should You Increase Stakes In American Airlines Stock?

AAL: American Airlines logo
American Airlines

The benchmark oil prices have been weighing on airline stocks since January as fuel costs account for almost quarter of total operating expenses. Per annual filings, American Airlines (NASDAQ: AAL) does not have fuel hedges to shield itself from short-term price fluctuations. Thus, the company’s low single-digit net margin is likely to turn negative for a couple of quarters. Currently, the stock has lost just $6.6 billion in market capitalization despite the $6 billion of operating cash burn in the last two years and $20 billion of long-term debt obligations on the balance sheet. As highlighted in our earlier article, American Airlines Stock To Tread Water?, the company requires sizable margin improvement to lower its debt obligations. Our interactive dashboard on American Airlines Earnings Preview portrays the historical trends in revenues, earnings, valuation multiple, and forecast for Q1 2022.

Before the pandemic, American Airlines’ revenues observed an average growth rate of 6% p.a. from $36.5 billion in 2016 to $43.3 billion in 2019. Sale of air tickets and other ancillary services such as cargo & sale of loyalty points are key revenue sources of the company. Historically, topline expansion has been driven by continued capacity growth and improving fares. However, the company’s net margins have been low within the 2-5% range as the long-term debt obligations weigh on earnings.

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Passenger Demand Outlook

Despite concerns of high inflation, supply chain disruptions, and likelihood of macroeconomics due to the Russia-Ukraine war, the air travel demand remains strong as highlighted by passenger numbers at TSA checkpoints. Notably, passenger numbers are down by just 5-10% from pre-pandemic levels. Considering the stock performance of Allegiant Travel Company (NASDAQ: ALGT), which is an air carrier that operates in under-served U.S. cities, investors seem to be optimistic on long-term domestic travel demand.

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 Returns Apr 2022
MTD [1]
YTD [1]
Total [2]
 AAL Return 4% 6% -59%
 S&P 500 Return -2% -7% 99%
 Trefis Multi-Strategy Portfolio -1% -9% 259%

[1] Month-to-date and year-to-date as of 4/18/2022
[2] Cumulative total returns since the end of 2016

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