With 20% Gains This Month Is Alaska Air A Better Pick Than American Airlines Stock?

AAL: American Airlines logo
American Airlines

Given its better prospects, we believe Alaska Air stock  (NYSE: ALK) is a better pick than its peer, American Airlines stock (NASDAQ: AAL). AAL is trading at a lower valuation of  0.2x revenues than 0.5x for ALK. Investors have assigned a higher multiple to Alaska Air stock due to its better financial position, as discussed below. In the sections below, we discuss why we believe that ALK will offer better returns than AAL in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of American Airlines vs. Alaska AirWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

AAL stock has seen a decline of 20% from levels of $15 in early January 2021 to around $12 now. ALK stock has also seen a decline of 20% from levels of $50 in early January 2021 to around $40 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period.

Notably, AAL stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 14% in 2021, -29% in 2022, and -4% in 2023 (YTD), while returns for ALK stock were 0% in 2021, -18% in 2022, and -13% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that AAL underperformed the S&P in 2021, 2022, and 2023 and ALK underperformed the S&P in 2021 and 2023.

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  5. American Airlines Stock Has Struggled To Outperform The S&P- Here’s Why
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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including BA, UNP, and UPS, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AAL and ALK face a similar situation as they did in 2021 and 2023 and underperform the S&P over the next 12 months – or will they see a recovery? We expect a rebound in both stocks in the next three years, but ALK will likely fare better between the two.

1. American Airlines’ Revenue Growth Is Slightly Better

  • American Airlines’ revenue growth has been slightly better, with a 25% average annual growth rate in the last three years, compared to 23% for Alaska Air.
  • The rise in revenues for both airlines over the recent years can be attributed to a rebound in air travel demand, with passenger traffic and ticket yield rising meaningfully in recent years.
  • For perspective, American Airlines’ available seat miles (ASM) declined 25% between 2019 and 2021 but surged 21% y-o-y in 2022. Similarly, its passenger revenue per available seat mile (PRASM) fell 18% between 2019 and 2021 but rose 41% y-o-y in 2022.
  • In comparison, Alaska Air’s ASM declined 21% between 2019 and 2021 but surged 16% in 2022. Similarly, its PRASM fell 11% between 2019 and 2021 but rose 35% y-o-y in 2022.
  • Looking at the last twelve months, American Airlines’ 17% sales growth has fared better than 14% for Alaska Air.
  • The demand for air travel is expected to remain high in the near term, boding well for both stocks in the near future. However, the average ticket price has also cooled in the recent past while overall capacity has expanded.
  • For perspective, American Airlines’ revenue of $13.5 billion in Q3’23 was flat y-o-y. The company reported ASM growth of 7%, but the load factor declined 130 bps, and PRASM declined 6%. Similarly, Alaska Air’s revenue of $2.8 billion in Q3’23 was also flat y-o-y. Although the company reported a 14% rise in available seat miles, the load factor was down 190 bps, and yield declined 10%, weighing on its overall top-line growth.
  • Our American Airlines Revenue Comparison and Alaska Air Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, we expect Alaska Air to see better revenue growth than American Airlines.

2. American Airlines Is More Profitable 

  • American Airlines’ operating margin slid from 7% in 2019 to -60% in 2020 before recovering to 3% in 2022. In comparison, Alaska Air’s operating margin plunged from 12% in 2019 to -50% in 2020 before recovering to 1% in 2022.
  • Looking at the last twelve-month period, American Airlines’ operating margin of 7% fares better than 1% for Alaska Air.
  • Earlier this year, American Airlines closed negotiations with pilots, agreeing to an increase in pay by 46% over the next four years and this will result in higher costs for the company.
  • Alaska Air’s margin metric is partly being weighed down by the costs associated with the retirement of its Airbus fleet. Looking forward, the company is likely to have a better margin profile with lower costs associated with pilot training.
  • Our American Airlines Operating Income Comparison and Alaska Air Operating Income Comparison dashboards have more details.

3. Alaska Air Is Comparatively A Less Risky Pick

  • Looking at financial risk, Alaska Air fares better. Its 140% debt as a percentage of equity is lower than 419% for American Airlines, while its 16% cash as a percentage of assets aligns with that for the latter, implying that Alaska Air has a comparatively better debt position and a similar cash cushion.
  • The high debt-to-equity figures for both airlines can be attributed to much higher debt levels compared to their market capitalizations ($8 billion for AAL and $5 billion for ALK).
  • American Airlines’ total debt increased from $24.3 billion in 2019 to $33.5 billion now, while its total cash increased from around $4.0 billion to $11.5 billion over the same period. However, the rise in cash balance is primarily due to additional debt raised, as heavy negative operating cash flows in 2020 of $6.5 billion almost completely wiped out positive operating cash flows in 2019, 2021, and 2022.
  • In comparison, Alaska Air’s total debt increased from $3.2 billion in 2019 to $4.1 billion now, while its cash increased from $1.5 billion to $2.5 billion over the same period. The rise in cash balance is partly due to additional debt raised, given the $4 billion negative operating cash flows in 2020.

4. The Net of It All

  • We see that American Airlines has seen superior revenue growth and is more profitable. On the other hand, Alaska Air has a better financial position.
  • Looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Alaska Air will likely offer better returns over the next three years, primarily due to its better-expected revenue growth.
  • If we compare the current valuation multiples to the historical averages, ALK fares better. American Airlines stock trades at 0.2x sales compared to its last five-year average of 0.4x, and Alaska Air stock trades at 0.5x revenues vs. the last five-year average of 1.1x.
  • Our American Airlines (AAL) Valuation Ratios Comparison and Alaska Air (ALK) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 5% for American Airlines and 45% return for Alaska Air over this period, based on Trefis Machine Learning analysis – American Airlines vs. Alaska Air – which also provides more details on how we arrive at these numbers.

While ALK may outperform AAL in the next three years, it is helpful to see how American Airlines’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Nov 2023
MTD [1]
YTD [1]
Total [2]
 AAL Return 10% -4% -74%
 ALK Return 19% -13% -58%
 S&P 500 Return 9% 19% 103%
 Trefis Reinforced Value Portfolio 8% 27% 553%

[1] Month-to-date and year-to-date as of 11/30/2023
[2] Cumulative total returns since the end of 2016

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