- American Airlines stock has underperformed its major airline peers and the S&P 500 index.
- The COVID-19 pandemic has changed the dynamics of the travel industry as leisure travel outpaces business travel.
- American Airlines is seeing 2023 revenues surpass pre-COVID levels as normalization continues to help the epicenter travel industry recover.
- 5 stocks we like better than American Airlines Group
The airline industry suffered tremendous setbacks during the COVID-19 pandemic as lockdowns and travel restrictions severely cut revenues. Travel demand has rebound strongly in 2023, and airlines are seeing a light at the end of the tunnel as many return to profitability.
One of the largest and most well-recognized airlines is the American Airlines Group. We will thoroughly analyze the performance of the company and its underlying stock price from an investment perspective. After finishing this article, you can make a more informed decision when asked, "Is American Airlines a good stock to buy?"
Overview of American Airlines
American Airlines started by consolidating 82 small airlines in the U.S. under the name American Air Ways. The company primarily transported mail around the country. It was acquired and changed its name to American Air Lines in 1934. American started transporting passengers in 1936 with flights to Newark, New Jersey, from Chicago, Illinois.
American commenced trading on the New York Stock Exchange in 1939. American was the first to offer an invite-only private airline lounge, the Admiral's Club, at New York's LaGuardia Airport in 1940. American began offering trans-Atlantic service in 1945. It also created the first airline loyalty program called AAdvantage™ in 1981.
Its official name, American Airlines Group, was created upon the merger of American Airlines and U.S. Airways Group in 2013. Through many acquisitions and mergers, the company has grown into the country's largest airline, with over 900 aircraft carrying more than 165 million passengers annually to over 350 destinations in over 60 countries.
The airline employs over 100,000 people, from pilots to flight attendants and ground crew. Revenues climbed to $45.77 billion in 2019 before the COVID-19 pandemic. They fell as low as $17.33 billion in 2020.
The robust travel demand recovery helped American revenues to surpass 2019 hitting $48.9 billion in 2022. If you're asking yourself, "Should I buy American Airlines stock?" — read on. While American Airlines is a widely held and recognized company, it is not a blue chip stock.
Latest American Airlines Stock News
Labor costs went up for airlines in 2023 as new contracts with various labor unions negotiated. All airlines were at the bargaining table to avoid costly strikes and ensure fluid operations. American Airlines reached major labor contracts with its most prominent unions.
American Airlines reached a tentative six-year agreement with the Allied Pilots Association (APA) on March 17, 2023. The new contract includes pay raises, improved work rules and new benefits for its pilots. Pilots will receive a $15,000 payment upon ratification of the contract. Pilots will receive a 10% pay raise for the contract's first two years and 3% annually for the remaining four years. The contract includes new work rules giving pilots more flexibility and control over their schedules. Pilots receive new benefits, including a 401(k) matching program and tuition reimbursement. American Airlines expects an additional $1.8 billion annually to cover the costs, but it assures the continuity of service and eliminates the risk of a pilot strike.
After a year-long negotiation, American Airlines reached a five-year tentative agreement with the Transport Workers Union (TWU). The deal provides pay raises, improved work rules and benefits for its flight attendants. This will cost American an extra $1.2 billion in annual expenses.
American Airlines reached a four-year tentative agreement with the International Brotherhood of Teamsters (IBT). It includes pay raises, improved work rules and new benefits for ground workers. The agreement will cost an extra $800,000 million in annual costs.
Challenges in the Airline Industry
The airline industry faces constant challenges every day. Here are some of the most significant challenges. Consider these factors when answering, "Is American Airlines a good stock to buy now?" These factors help you determine if AAL stock is a buy or sell.
Every business competes, but airlines compete minute-to-minute on ticket prices, routes and schedules. Promotions to keep loyal customers flying with its brand are essential. Loyalty programs are competitive with their perks to keep membership growing. Financial metrics like revenue per available seat mile (RASM) and cost per available seat mile (CASM) are analyzed to determine efficiency and margins.
Since airplanes burn so much fuel, rising fuel costs can significantly impact operational costs and operating margins. Airlines try to hedge against price volatility, but it remains a challenge.
Severe weather can cause flight delays and cancellations. This can cost airlines in terms of refunds, vouchers and reimbursements.
Weak macroeconomic conditions can impact disposable income that would otherwise be used for travel and leisure. Recessions are painful for airlines.
It's one of the high costs of operating an airline. Airlines want to avoid union strikes through careful negotiations with each respective union. American Airlines closed new labor contracts with the three major unions, including the APA, TWU and IBT, in 2023.
The Federal Aviation Administration (FAA) is the government agency that oversees all regulations for U.S. civil aviation. It operates the country's air traffic control system. It oversees aircraft and pilot certification, airport safety, and flight inspections. Airlines must comply with regulations from various agencies to avoid penalties and restrictions.
New technology innovations for aircraft and information systems can improve operational efficiency. Technology disruptions like computer and software glitches can be costly for airlines. Southwest Airlines had a computer outage for several days in December 2022, impacting over 16,000 flights and costing the airline more than $800 million in refunds and compensation.
Performance of American Airlines Stock
American Airlines stock prices have had a rollercoaster ride in the past decade. It hasn't been a good stock for long-term investors as its underperformed its peers and the benchmark S&P 500 index.
American Airlines Group Inc. NYSE: AAL stock hit its all-time high of $59.34 in November 2006. The global financial crisis and the bear market decreased its shares to a low of $2.50 per share in March 2009. Its stock performance has not been favorable for long-term holders. AAL stock has vastly underperformed the S&P 500 benchmark index, which has a 10-year performance of 146.5% versus AAL 10-year performance down (26.25%). AAL 10-year performance is down (26.25%). AAL five-year performance is down (67%), and its one-year performance is down (9.5%). At $14.02, AAL trades at 5.5X forward earnings and has a 10.85% short interest.
American Airlines has a weak but improving balance sheet in 2023. As of March 31, 2023, it has $66.8 billion in total assets and $72.5 billion in total liabilities resulting in a net asset balance of ($5.7 billion) and a negative book value. The debt-to-equity ratio is 83.6%. The company expects 2023 free cash flows of $3 billion, which will be used moving forward to pay down a large portion of the debt. Its assets comprise $11.4 billion in cash and short-term investments. Its operating property and equipment are $30.1 billion, and accounts receivable of $2 billion. Long-term debt is $31.6 billion. American Airlines' income statement and balance sheet can be found at MarketBeat.
American Airlines stock is trading at the low range of its historical forward P/E at 5.5. Its price/sales (P/S) is also low at 0.18. Its weak balance sheet and high debt levels take away from its valuation, but rising free cash flow can offset portions of the debt as it gets paid down. The MarketRank™ Forecast suggests a 26.6% upside price target of $17.75.
Future American Airlines Outlook
American Airlines expects full-year 2023 revenues between $52.71 billion and $55.04 billion. It forecasts full-year 2023 adjusted profits between $2.50 to $3.50 per share, driven by strong travel demand and improving demand for long-haul international travel. This is above consensus analyst estimates at $2.35 per share. The forecast includes the estimated costs of its new labor agreements.
American is adapting to post-pandemic travel trends as business travel makes up less than 40% of the trips compared to over 50% pre-COVID. The company has reduced shorter routes usually used for business and expanded more leisure and personal travel routes. For example, it is reducing New York to Chicago flights and adding more New York to Tulsa flights. Its AAdvantage also adapts by making earning miles for non-business trips more straightforward. As one of the worst debt-laden airlines during the pandemic, management has clarified that reducing debt is a top priority. The business has shifted due to consumer discretionary spending from goods to services.
American Airlines will continue to be one of the largest airline carriers in the world. It plans to invest in new aircraft, including the Boeing 787 Dreamliner and Airbus A321, which are more fuel efficient and modern. American will continue to expand its network by adding new routes and destinations catering to travel demands. It will continue to invest in technology to make it easier and more convenient for customers to purchase tickets and make changes through mobile apps and self-serve kiosks. The company is a big proponent of sustainability and continues to offset emissions by investing in projects focusing on reducing greenhouse gasses. American Airlines is increasingly focusing on ESG factors to improve its sustainability practices, like investing in sustainable aviation fuel (SAF), which is cleaner burning and made from renewable resources.
American Airlines has prioritized paying down its debt by improving free cash flow. It doesn't face immediate problems with bond maturities as it has yet to default on any of its debts since 1989. Its 6.5% senior secured notes, 9.25% senior secured notes, and 11% senior secured notes, issued in 2022, are due in 2025. They have a Ba2 rating from Moody's and a BB rating from Fitch.
Normalization refers to returning companies to pre-pandemic levels. Normalization is a revision to the mean progress where business returns toward pre-pandemic levels. For technology companies that saw their shares skyrocket during the reopening saw normalization as customer demand tapered off while supply was strong. However, airlines were an epicenter during the pandemic causing share prices to plummet by triple-digit percentages. Normalization for airlines happens as revenues rise to pre-COVID levels. Normalization for American Airlines implies the business will continue to improve, giving shares more upside potential and helping you decide on an AAL stock buy or sell.
Is American Airlines a good stock to buy now? Here are some frequently asked questions about American Airlines to determine whether you should make an AAL buy or sell decision.
Is American Airlines a good investment now?
If you're wondering is AAL a good stock to buy, then first ask yourself what your tolerance is to a (50%) or more loss. While American Airlines is a well-known and widely held stock, the stock has vastly underperformed the benchmark indexes like the S&P 500. Its heavy debt load and the cyclicality of the airline business make it a risky stock to hold. Rising fuel prices, labor shortages and heavy competition with other airlines can make this a risky proposition for investors seeking a stable growth stock or an income stock since AAL doesn't pay dividends. It is hardly one of the most upgraded stocks in the travel segment, nor will it become a meme stock mover.
If you had bought AAL stock 10 years ago, you would still be down (26.25%) compared to the S&P 500 index, which rose 146.5%. If you see the glass half full, you might think that AAL has more upside potential because the stock has been beaten down.
What are the best airline stocks to buy now?
Airline stocks have predominantly underperformed the S&P 500. American Airlines has been one of the worst performers, with a 10-year stock performance down (26.25%) compared to the S&P 500 being up 146.5%. United Airlines has a 10-year stock performance of 29.73%. Delta Air Lines has a better 10-year performance of 79.23%. Southwest Airlines has one of the best 10-year stock performances, up 99.1%. Unlike most airline stocks, Southwest stock pays a dividend. Remember that past performance is not an indicator of future returns.
What is the future of American Airlines stock?
American Airlines stock has been in a monthly descending triangle pattern. This consists of lower highs on bounces and a flat bottom. Connecting a diagonal trendline of the lower highs and a horizontal trendline of the flat bottom result in a triangle pattern. AAL will break out of the triangle above its monthly 20-period exponential moving average (EMA) resistance at $15.62 to rise into the $20s range or break down through the $8.25 flat trendline bottom, falling towards the $5.50 range. Its earnings performance will be the primary catalyst in determining where the stock goes, to go toward an American Airlines buy or sell or not.
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