We recently compiled a list of the 10 Best Airline Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where American Airlines Group Inc. (NASDAQ:AAL) stands against the other airline stocks.
We also dive deep into trends in the commercial aviation industry, especially the impact the return of international travel to pre-pandemic levels has had on the airline industry.
The coronavirus pandemic wreaked havoc across the global airline industry. According to the International Air Transport Association (IATA), industry revenues slumped from $838 billion in 2019 to $384 billion a year later, registering a 54.1% downfall. However, the market has gradually recovered over the last few years and is on track for solid growth as international travel resumes worldwide.
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A report by UN Tourism in January this year stated that international tourism was recorded in 2023 at 88% of pre-pandemic levels, and is on track to return to levels before the coronavirus struck. The IATA anticipates global airline revenue to reach $996 billion in 2024, 19% higher than in 2019 and 1.5 times higher than the pandemic low of 2020.
The global travel recovery has been led by the Middle East, the strongest tourism market in 2023, as it welcomed 22% more travelers than it did in 2019, becoming the only region to prevail over pandemic levels. Europe reached 94% of the levels in 2019, while Africa stood at 96%. Asia Pacific has been rather slow, recovering only 65% of pre-pandemic levels as of last year.
The uptick in international travel is yielding solid returns this year. As of October 23, 2024, a major airline ETF issued by U.S. Global Investors has grown by 18.44% YTD, outperforming the broader market by 4.5%. Analysts at Forbes believe airline stocks are poised for strong growth during the second half of 2024 as fuel prices dip after long periods of price hikes. Fuel accounts for between 20-30% of airlines’ total costs. Moreover, airlines in the US are cutting down on excess domestic capacity after compressed margins during the summer season. The oversupply of seats has resulted in lower fares, and airline operators are determined to correct that. The deceleration of capacity, coupled with strong travel demand, will enhance their pricing power and improve earnings.
Hedge fund sentiment on airline stocks is also encouraging. Tony Bancroft from Gabelli Funds shared his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26. He noted a significant growth in aircraft orders, resulting in major aircraft manufacturers having a 12-year backlog of orders. Bancroft cited China as the primary catalyst driving robust demand.
According to the portfolio manager, the country represented 20% of all new aircraft orders as Chinese airlines strive to cater to the growing demand for travel among the middle class at home and in neighboring India. Bancroft also highlighted the rising middle class in the United States and other parts of the world that are increasing international travel, and contributing to the strength of the commercial aviation industry.
Methodology
We sampled stocks from ETFs with airline exposure and then picked the top 10 companies with the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company. Data on hedge funds was sourced from Insider Monkey’s database of 912 hedge funds for the second quarter of 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A passenger jet taking off, representing the company’s commitment to air transportation services.
American Airlines Group Inc. (NASDAQ:AAL)
Number of Hedge Fund Holders: 38
American Airlines Group Inc. (NASDAQ:AAL) is an airline holding company, which owns American Airlines – one of the largest commercial airlines in the world with over 900 aircraft in its fleet, flying passengers to more than 350 destinations worldwide.
The airline operates around 6,700 flights daily to and from its strong network of hubs in various key cities of the United States. These include Charlotte, Chicago, Dallas-Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C.
During Q2 2024, American Airlines Group announced a record quarterly revenue of $14.3 billion, up 2% year-over-year, and posted an adjusted pre-tax profit of $1 billion. Net income for the second quarter stood at $774 million, translating to earnings per share of $1.09. The results were in line with the revised guidance issued in May. However, CEO Robert Isom admitted that the revenue performance was not where the company wanted it to be.
The air carrier’s revenues have been affected by an imbalance between domestic supply and demand, which has prompted airlines to discount tickets, resulting in weaker pricing. Unit revenue was down 5.6% during Q2. The company’s figures have also been negatively affected by approximately $750 million year-to-date from its ineffective sales and distribution strategies.
The airline has now vowed to diligently ensure that capacity does not outgrow demand. The management has decided to lower capacity growth for the back half of the year and plans for a capacity increase of 3% in the third quarter. With these measures, the company expects full-year TRASM to be down between 3% and 5% compared to 2023. It also anticipates achieving cost savings worth $400 million in 2024 and is working on a course correction plan for its sales and distribution strategy.
The company is confident of overcoming the headwinds it currently faces to further solidify its position in the industry. Wall Street analysts also remain bullish on the stock and have consensus on American Airlines Group Inc. (NASDAQ:AAL)’s Buy rating, with an average share price upside potential of 5.50%. Moreover, as of June 30, 2024, 38 hedge funds tracked by Insider Monkey had investments in the company, making it one of the best airline stocks to buy according to hedge funds.
One reason driving investor confidence is the airline’s strong liquidity position. During Q2 2024, American Airlines generated $850 million of free cash flow, which meant it ended the quarter with $11.7 billion in total available liquidity. It also ended debt worth $680 million during the quarter, taking the total debt reduction figure from the peak levels of 2021 to $13 billion. The airline is on track to reduce debt by $15 billion from peak levels by the end of 2025.
Overall AAL ranks 3rd on our list of the best airline stocks to buy according to hedge funds. While we acknowledge the potential of AAL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AAL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.