American Airlines Stock: Diligently optimistic about the future (NASDAQ: AAL)
American Airlines (NASDAQ: AAL) reported earnings last week and shares have gained 4% since then. I also covered United Airlines (UAL) earnings last week, and listening to the calls and reading the transcripts from both companies, there was a striking difference. Both airlines are optimistic for the second quarter of 2022 and 2022 as a whole. However, while United Airlines appeared to be launching investments in airline stocks, American Airlines was more detailed on key elements such as recovery trajectory and debt reductions. As an analyst and investor, I appreciated the effort American Airlines put into their advice.
American Airlines loss worsens in first quarter
Compared to a year ago, revenue increased by $4.9 billion. However, due to increased airline activity and higher fuel prices, operating expenses increased by $5.3 billion. As a result, the operating loss widened year on year. TRASM (Total Revenue per Available Seat-Mile) improved by more than 40% and CASM excluding fuel and special items improved by 20%. So while losses have widened, we are seeing good unit improvements, and as more aircraft enter service, those unit costs will come down further. For example for the Boeing 787s which have not yet been delivered, American Airlines has the crews in place (but the planes have not been delivered). So, at this point, these crews have provided an overcharge which will decrease once the Dreamliners are delivered later this year.
The goal is of course to meet and exceed 2019 results, so it’s also important to compare the numbers to 2019. Revenue for Q1 2022 was back 84% from Q1 2019, and we see that in March, domestic leisure travel was already higher than in 2019, which has happened twice before during the pandemic, but what is probably more encouraging is that business travel is also on the way back and the result is that the strong increase in unit revenue and booking volume helped American Airlines recover 98% in March and 84% for the quarter.
What I liked about American Airlines’ presentation and earnings call is that they provide good placement in context and focus on what matters. They showed that domestic leisure has fully recovered, as is international short-haul, with domestic business at 84% recovery and international long-haul at 50%. This clearly shows that the recovery is strong, but also that there is significant room for improvement from current levels.
Balance sheet repair
Another item I enjoyed on the earnings call was the balance sheet repair slide. This shows that American Airlines is still aware of the high level of debt and has the ambition to reduce this debt. They will make debt repayments of $1 billion in the second quarter, which may further contribute through its debt reduction efforts and as the recovery gathers pace we may see an acceleration in debt repayment. debt, as liquidity levels will be reduced from $15.5 billion to $10 billion. $12 billion. It’s an ambitious goal, but a strong recovery could certainly support such an effort.
Optimistic outlook for Q2
For the second quarter, American Airlines expects capacity to be recovered to 92% to 94% of 2019 levels and revenue growth of 6% to 8% with non-fuel CASM up 8% to 10% . Despite higher unit costs excluding fuel and a higher fuel bill, a margin of 3% to 5% is expected. It should be noted that this is significantly lower than the competition. It is a focal point for American Airlines in the future. The company has accumulated debt to renew its fleet and it’s a short term pain because its debt is high and so are the interest payments, but as these planes start flying more and more, especially in an environment where the cost of fuel is high and the debt is repaid the margins should increase and ideally they should reach a minimum of 10%.
For the full year, capacity and CASM are expected to show the same difference compared to 2019.
I would say that the outlook provided by American Airlines is solid. The airline faces some pressure as it has prepared for the delivery of additional Dreamliners by early this year, but they are now expected to arrive in October and beyond. So this provides some overhead, but as the pent-up demand results in increased passenger numbers with high yield, there should be a significant improvement in revenue that will allow the airline to increase utilization. and reduce CASM. This, in turn, will result in increased confidence in the airline’s management and lower liquidity levels, which can bolster the debt reduction effort and allow margins to recover. It all depends of course on the strength of the market and in particular on the development of international demand and the consequences of the removal of the mask mandate for the number of infections. Ultimately, what I could gather from American’s earnings call is that they’ve been much more focused on what matters versus United Airlines and what that might make the company a preferred investment in the airline industry in the future.