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Why American Airlines Stock Could Decline from Here
Stock Analysis & Ideas

Why American Airlines Stock Could Decline from Here

It’s no coincidence that U.S.-listed aviation stocks saw a broad downtrend just a few weeks ago amid rising oil prices. One of the losers was American Airlines (AAL), a Texas-based provider of passenger and cargo air transport in the U.S. and overseas.

Although its stock has rebounded recently, I believe it will decline in the coming weeks due to the factors mentioned below. Thus, I am bearish on this stock.

Higher Fossil Fuels Prices Weigh on Airline Stocks

Certainly, it’s no easy feat for airlines to continue offering the service at higher rates without seeing a drop in demand at the same time. These companies use hedging tools to control energy costs. However, when fossil fuel prices, which account for a significant portion of their operating expenses, rise too quickly and for too long, as is the case now, the strategy may be less effective.

Oil Prices May Rebound

Over 14 million Shanghai residents have done molecular swab and antigen testing to contain the COVID-19 epidemic. This has led to somewhat lower oil prices of late as the market joins fears of possible restrictions that could hurt oil demand. 

However, these are only short-term effects, while the factors that led to the commodity hitting $100/barrel and surging this year are much stronger and longer-lived. These include the rapid increase in fossil fuel demand after the strong recovery from the COVID-19 crisis and the supply disruptions caused by the Russian invasion of Ukraine.

The subsequent increase in energy costs (the key component of the current high inflation) is not a real problem for companies as long as they pass the costs on to the end-user.

Factors in Bearish Sentiment

American Airlines will continue to suffer from rising fuel prices and lower consumer confidence as a possible consequence of tighter monetary policy from the Federal Reserve.

The U.S. Federal Reserve plans to raise interest rates six times this year and four times in 2023 to stem the rapid rise in annual inflation. So, the end of loose monetary policy to support economic growth could potentially hurt employment enough to force households to cut spending on various goods and services.

Should that happen, the backdrop will make it difficult for American Airlines and other operators to bring passenger traffic and cargo capacity back to pre-pandemic levels.

My expectations are supported by Statista estimates, which suggest that a significantly lower number of about 3.43 billion passengers will use global airlines this year, compared to the pre-pandemic level of ~4.7 billion passengers.

As the Asia-Pacific region typically accounts for the majority of passenger air traffic (one-third of the world total) and the busiest air routes, the expected development of the U.S. market compared to the global industry could be even less important than one might think.

In addition, it should be noted that these statistics are from October 2021, before the Federal Reserve announced its plan to ditch accommodative monetary policy in favor of tighter policies. 

Global air freight already appears to be impacted by macroeconomic conditions and subsequent policy actions. Weekly air freight rates actually fell from an average of $4.3 per kilogram in 2021 to a lower average of $4.2 per kilogram in February-March 2022, Statista estimates.

These forecasts also won’t spare American Airlines’ demand for passenger and cargo services, with analysts forecasting -$2.51 EPS for 2022.

American Airlines’ Q1-2022 Outlook

American Airlines’ near-term outlook is not too bright, as the company forecasts 10% lower capacity and more than 20% lower revenues for the first quarter of 2022 compared to last year’s quarter.

In light of current macroeconomic conditions and expected trends in airline passenger and cargo services, American Airlines’ share price could continue to decline for the foreseeable future.

Wall Street’s Take

In the past three months, 13 Wall Street analysts have issued a 12-month price target for AAL. The company has a Hold consensus rating based on one Buy, nine Holds, and three Sell ratings.

The average American Airlines price target is $17.94, implying 0.9% downside potential.

Conclusion

The current macroeconomic conditions of high inflation, high fossil fuel prices, and geopolitical tensions are not beneficial for the airline industry, nor is anti-inflationary monetary policy, as it poses a significant risk of economic recession.

Expected trends in passenger and cargo services are also not helpful for a stock price recovery. Most likely, shares will remain in a bearish mood for the time being, which could stretch for several weeks.

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