Should You Hold American Airlines (AAL)?

Financial pros searched out American Airlines (AAL) stock in the past week more than any other airline.

That’s odd, considering American Airlines reported earnings back in late July.

We didn’t see any specific news events that tied to the increased activity.

But here’s what we did find.

American Airlines’ Business

American Airlines operates a vast network of over 350 destinations in more than 50 countries. 

The company’s fleet of nearly 1,000 aircraft ranges from regional jets to wide-body long-haul planes, catering to both domestic and international travelers. 

American’s AAdvantage loyalty program, with over 115 million members, remains a cornerstone of its customer retention strategy.

American Airlines segments its business into the following areas:

• Passenger Revenue (91% of total revenues) – Includes ticket sales for scheduled flights, ancillary fees, and frequent flyer program revenues
• Cargo (1% of total revenues) – Freight and mail transportation services
• Other Revenue (8% of total revenues) – Primarily loyalty program marketing services, airport clubs, and vacation packages

In its latest quarterly report, American Airlines posted record revenue of $14.3 billion for Q2 2024. 

However, the company faced headwinds from an imbalance in domestic supply and demand, alongside challenges stemming from its previous sales and distribution strategy. 

These factors contributed to a year-over-year decline in net income, prompting a recalibration of the airline’s commercial approach.

American Airlines has taken swift action to address these challenges, including adjusting capacity growth and revamping its sales and distribution strategy. 

The company has reinstated competitive fares in traditional distribution channels and expanded the benefits of its AAdvantage Business program. 

These moves aim to win back corporate and agency partners, which is crucial for regaining market share in premium revenue streams.

Despite recent setbacks, American Airlines continues to leverage its strengths. 

The company’s loyalty program and premium product offerings have shown resilience, with AAdvantage revenue growing 8% year-over-year and premium cabin revenue increasing by 9%.

Financials

Source: Stock Analysis

American Airlines is on the cusp of becoming free cash flow positive.

They managed to do it in 2023, generating $3.8 billion in cash from operations while spending $2.4 billion on CAPEX.

However, the trailing 12-month window has seen cash from operations plunge to $2.0 billion as YOY operating expenses climbed due to higher salaries and wages from new contracts.

Flight attendant wages will increase 18% to 20.5% in the coming quarters.

Pilot wages are set to climb 46% over four years starting at the beginning of 2024.

Excess cash has been used to aggressively reduce debt, which sits at $39.4 billion, down from $46.2 billion in 2021. The goal is to get below $35 billion by 2028.

Valuation

Source: Seeking Alpha

American Airlines is one of the only airlines that generate positive earnings and cash from operations.

And while they may look incredibly cheap on a price-to-cash flow basis, remember they are underwater now with scheduled CAPEX plus the expected labor cost increases.

Growth

Source: Seeking Alpha

Despite a dour outlook issued by Delta Airlines, American expects ~5% revenue growth in 2024, adding to its significant rebound in the past several years.

This aligns with most other airlines’ outlook, many of which expect 2024 to be more challenging than 2023.

Profitability

Source: Seeking Alpha

Currently, American Airlines is at the top of the gross margin group. However, its net income margin is slightly negative, which isn’t bad compared to this group.

Still, it’s closer to positive free cash flow than most others.

Our Opinion 8/10

While lower consumer spending will certainly hurt American Airlines this year, we see this as a speed bump in an otherwise well-executed post-pandemic recovery.

Management has clear goals and plans to reduce its debt load while delivering quality service to customers.

This stock may take a while, but we believe its one of the most undervalued in the industry.

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