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AAL Stock Remains a Market Laggard With Scale Issues

Optimism currently surrounding American Airlines (NASDAQ:AAL) stock following its Q2 earnings release seems exaggerated. 

AAL stock American Airlines plane on ramp in Chicago Airport.

Source: GagliardiPhotography / Shutterstock.com

A recent Barron’s article even went so far as to call American Airlines “the year’s best airline stock.” The article didn’t explain the arguably hyperbolic claim, but I can assume that it was based on year-to-date price appreciation among the big four U.S. airlines. 

AAL shares have appreciated in price by roughly 27% year-to-date. Delta (NYSE:DAL) is down about 2%, United Airlines (NYSE:UAL) stock has risen by 6.5%, and Southwest (NYSE:LUV), roughly 7%. 

So, yes by that standard it is the best airline stock yet in 2021. But that hardly means much and isn’t a convincing reason to get into a position in AAL currently. 

Hit Hard Due to Size

American Airlines was the worst hit during the pandemic. It went into the pandemic as the largest airline as measured by fleet size, and remains so. The high operating costs of maintaining the world’s largest idle fleet was one of several reasons American was considered at high risk of bankruptcy early in the pandemic. That threat didn’t materialize, but American Airlines isn’t attractive either. 

American Airlines remains middle of the pack at best. Throughout the pandemic you would have been hard-pressed to find headlines which suggested American was a better investment than Southwest or Delta. That remains true today. 

Profits 

American Airlines’ July 22 earnings report was filled with positive news.  Well, the details and presentation were ostensibly meant to portray the company’s direction as positive anyway.  

American Airlines did post a second quarter profit of $19 million. That’s a very modest number for an organization of its size, but a positive number, nonetheless. 

Yet, at the same time investors can’t simply rely on such profit figures without the benefit of context. Southwest managed to post a profit of $348 million in the same period. Analysts were sure that it would rebound quicker than American Airlines as it is operationally much more sound. By that metric, it has. 

Further, $19 million is merely a drop in the bucket to AAL stock s at its scale. At the height of the pandemic in April of 2020 the company was burning through $100 million in cash every day. In the fourth quarter of 2020 that figure was still around $30 million per day. 

Paying Down Debt

Thankfully, the company has fixed its cash burn issue to a degree. It reported that it has entered a cash build period of $1 million per day in the second quarter. That is all good and well and serves to entice investors. But I would caution that investors exercise a bit of restraint in regard to the company’s debt plans. 

As it stated in the earnings report: “The Company now expects to reduce its debt by more than $15 billion by the end of 2025 versus its previous guidance of $8 billion to $10 billion.” This is little more than a rough estimate based on optimism from opening air travel.

American did pay down a $950 million loan due in April of 2023 but remains highly levered. 

Too Early for AAL Stock

Although travel has opened up it remains too early to understand the ramifications of the pandemic on the airline industry. The Delta variant of Covid-19 makes the reopening more difficult to judge. It could deal a blow to airlines. But even without attempting to factor it in, there is another sign American has trouble. 

The yield of AAL stock is down. Yield is a calculation of the average fare per passenger per mile. It’s 10.1% lower throughout the first half of 2021 than in 2020. Yes, there are multiple potential explanations, but the thrust is still negative. 

Overall, AAL stock remains one of the weaker airlines despite the rosy prognostications of management.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the biedexmarkets.com.com Publishing Guidelines.