Stock Analysis & Ideas

American Airlines: More Profitability to Come, Favorable Industry Outlook

Story Highlights

Airline companies have started to recover from the pandemic, but rising interest rates and high inflation have now hurt bottom lines. Despite these issues, American Airlines dished out a respectable second-quarter earnings result that signaled the start of profitability.

American Airlines (AAL) reported its second-quarter earnings on July 21. Its results showed a massive bump in sales from the prior-year period despite inflation, network disruptions, and labor shortages. Moreover, it expects to post a profit during the third quarter. Hence, due to its profitability prospects and the broad-based recovery in travel demand, we are bullish on AAL stock.

American Airlines Operates in a Risky Industry

Airline investors have been through a lot in recent years. First, the industry witnessed a significant fall in revenue during the peak of the pandemic when travel demand ceased to exist. Then, this year was supposed to kickstart a rebound, but macroeconomic instability has brought up more complications than imagined.

Inflation, in particular, has resulted in high fuel and labor costs, leading to lower profit margins for airline companies. Moreover, the same issue has chipped away at household budgets, which means fewer consumers are willing to book flights.

Airline stocks plummeted soon after the June inflation data was published, which showed higher-than-expected core inflation. Furthermore, American Airlines’ stock fell by more than 3% on June 13 when its competitor Delta Airlines (DAL) missed analysts’ earnings expectations for its second quarter.

However, it isn’t all that bad for American Airlines. A much stronger rebound in travel could potentially materialize in the upcoming quarters and help the company generate more revenue.

AAL’s Q2 Saw Profitability and a Strong Recovery

American Airlines’ second quarter results weren’t perfect, but they were positive overall. Non-GAAP earnings per share of $0.76 missed estimates by $0.01, but sales beat estimates by $20 million. The colossal ~80% year-over-year jump in sales to $13.42 billion was a record for the airliner.

Additionally, AAL’s EPS was the first positive EPS figure it had reported in close to nine quarters.

The company’s CEO, Robert Isom, stated, “We are very pleased to report a quarterly profit, excluding net special items, for the first time since the start of the pandemic, driven by the strong demand environment and the hard work of our team.”

Based on its robust second quarter, the carrier expects third-quarter sales to surpass 10% to 12% of pre-pandemic levels. Moreover, these results are based on 8% to 10% lower capacity. Also, the company made $1 billion in debt and finance payments during the second quarter.

It narrowed down its debt by a hefty $5.2 billion from its peak in mid-2021. As we advance, it expects to cut its debt by $15 billion by the conclusion of 2025.

Strong Industry Outlook Ahead

The International Air Transport Association (IATA) expects traveler numbers to rise to four billion by the end of 2024, which would finally surpass pre-pandemic levels.

Furthermore, the IATA said that traveler numbers will increase to 83% of 2019 numbers in 2022, 94% in 2023, and a whopping 103% in 2024. This is good news for airline stockholders because their holdings should bear fruit in the not-so-distant future.

The airline industry probably needs at least a year to recover from the pandemic, and, quite frankly, a lot can go wrong in the meantime. However, American Airlines looks like a solid candidate considering its strong performances of late. Moreover, increasing air travel and the company’s pricing power will help it offset higher fuel costs and labor costs. Hence, AAL finds itself in a relatively solid position.

Wall Street’s Take on American Airlines Stock

Turning to Wall Street, AAL stock maintains a Hold consensus rating. Out of eight total analyst ratings, zero Buys, six Holds, and two Sell ratings were given over the past three months.

The average AAL price target is $15.29, implying 11.2% upside potential. Analyst price targets range from a low of $13 per share to a high of $18 per share.

Conclusion: AAL’s Encouraging Outlook Gives It Life

The airline industry is dealing with plenty of issues at this time. Labor shortages, high fuel costs, and recession fears have left the market feeling pessimistic. However, American Airlines’ encouraging outlook for the future, pent-up travel demand, and its track record of resilience over the years will likely steer the business out of harm’s way.

It seems that the airliner can effectively tackle future headwinds. Moreover, its solid second quarter results have shown that it’s likely an incredible investment for the long haul. It should turn a profit in the upcoming quarter, which could potentially spark a rally in its share price. For long-term investors, it’s imperative to monitor if AAL succeeds in reducing its debt. 


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