Air carrier
American Airlines Group, Inc. NYSE: AAL stock is undergoing a late-stage rally with
COVID-19 vaccine distribution is underway. With shares still trading at nearly half its pre-COVID-19 highs, the stock is dramatically underperforming the benchmark
S&P 500 index NYSEARCA: SPY. This also creates potentially more upside heading into 2021 as bargains are hard to find in the current FOMO market environment. Since narrative drives sentiment which impacts stock price, the narrative for the travel and leisure sector has improved with the approval of COVID-19 vaccines with an expected return to normalcy in late 2021. The change of narrative is evidenced by the recovery in the travel and leisure segment which was the hardest hit by the
pandemic. Rather than chasing shares, prudent investors should wait for opportunistic pullback levels to consider gaining exposure.
Q3 FY 2020 Earnings Release
On Oct. 22, 2020, American Airlines released its fiscal third-quarter 2020 results for the quarter ending September 2020. The Company reported an earnings-per-share (EPS) loss of (-$5.54) excluding non-recurring items versus consensus analyst estimates for a loss of (-$5.55), a $0.24 beat. Revenues fell (-73.4%) year-over-year (YoY) to $3.71 billion beating analyst estimates for $2.81 billion. The Company had $13.6 billion of liquidity available. Capacity for Q4 2020 is expected to be down (-50%) YoY with international capacity down (-75%) YoY.
Bernstein 2020 Operational Decisions Conference
American Airlines Chief Revenue Officer, Vasu Raja, provided details at the Nov. 17, 2020, conference. Fourth quarter revenues for its short haul international network in Mexico and the Caribbean to “remain strong, achieving as much as 70% of 2019 levels.”, according to Raja. The rate-per-available-seat-mile (RASM) relative to competition has grown in the strongest hubs such as Dallas, Fort Worth, Phoenix and Charlotte. The northeast and west coast are weak spots where American Airlines lacks the network and serve more as an alternative to larger network competitors resulting in lagged RASM. Raja also added “Additionally, as we bring back the airline, we are going to brink back the airline that’s much more efficient than the one that was there before. And so, the combined effect of being more CASM (cost-per-available-seat-mile) efficient airline and a more RASM productive airline is something where we believe we can earn a lot more in a steady state and when we get to steady state is an open valid question.” Raja explained the most revealing predictive indicator for revenue in a reopened community, “So we find that people who are spending at full-service restaurants… a few days after that people start spending on travel.” He explained even while COVID-19 case counts hit record highs, the Company still sees ticket sales growth using Texas as an example. Raja also points that the circulation and distribution of COVID-19 vaccines is crucial to having managed business travel return after a period of lag according to his discussions with some of the largest clients of the airline.
Recent Events
According to the TSA, Thanksgiving holiday travel saw a surge of nearly 1.2 million passengers through TSA checkpoints, which was the highest since March 2020. Raymond James downgraded shares to underperform on Nov. 30, 2020. On Dec. 16, 2020, JPMorgan NYSE: JPM downgraded stocks in the airline sector including JetBlue NASDAQ: JBLU, Spirit Airlines NYSE: SAVE, and United Airlines NASDAQ: UAL to underweight from previous overweight ratings. With the approval to resume flying 737 Max airplanes by the FAA, American Airlines will be one of the first airlines to resume Boeing NYSE: BA 737 Max flights. The Company has grounded its 737 Max fleet of 24 airplanes since March 2020.
Business Update
On Dec. 4, 2020, American Airlines provided a business update. The Company stated that while Q4 started strong, the rising spread of COVID-19 and new travel restrictions have once again resulted in a slowdown in bookings growth. Due to the slowdown combined with rising fuel costs, the Company expects daily cash burn to come in near the high range of the previously estimated $25 million to $30 million per day. It also expects liquidity at the end of Q4 to be around $14 billion, which includes the undrawn portion of the CARES Act loan. The Company expects the recovery in demand to be volatile and difficult to accurately forecast. The combination of increasing spread surge and recent downgrade may give prudent investors opportunistic pullback levels for entries.
AAL Opportunistic Pullback Levels
Using the rifle charts on the monthly and weekly time frames provides a broader view of the playing field. The monthly rifle chart has a stalled downtrend as shares trade between the 5-period moving average at the $13.45 Fibonacci (fib) level and the 15-period MA at the $17.50 fib. The monthly stochastic is attempting a bullish 20-band mini pup through the critical 20-band on the weekly market structure low (MSL) buy trigger above $13.29. The monthly MSL buy triggers above $22.80. The weekly rifle chart formed a mini pup driving shares up to the $18.63 fib before the JPMorgan downgrade triggered selling. This formed a weekly market structure high (MSH) sell trigger under $16.16. Prudent investors can watch for entry at opportunistic pullback levels at the $15.67 fib, $14.41 fib, $13.29 fib, and the $12.81 fib. The upside trajectories range from the $19.93 fib up to the $25.45 fib. It’s a good idea to watch peers UAL, DAL and JBLU to gauge the industry sentiment and price trends since they all tend to move together.
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