American Airlines AAL reported smooth holiday travel in the Nov. 21-29 period. As a result of the demand surge, the Dallas Fort Worth or DFW International Airport (AAL’s home base) reported one of the busiest weeks. During the holiday travel season, since more people fly than at any other time of the year, the chances for chaotic schedule changes are high. As an example, Southwest Airlines LUV had to cancel 15,000 flights in 2022 in the Dec. 21-30 period due to the scheduling crisis. However, AAL excelled on that front this year.
Demonstrating great operational efficiency in the face of the demand surge, AAL, based in Fort Worth, TX, canceled one flight out of 7,200 at DFW Airport during the Nov. 21-29 period. System-wide, AAL completed 99.8% of its total flights without cancellation. During the Thanksgiving travel period, AAL operated a record 32,000+ flights. AAL had previously stated that during the Thanksgiving holiday period, Dec. 1 was expected to be its busiest in terms of travel, with 750,000 passengers likely to fly on more than 6,500 flights that day.
AAL Lifts Q4 Guidance
AAL lifted its fourth-quarter 2024 adjusted earnings per share guidance owing to favorable pricing and revenue environment. It expects fourth-quarter total revenues per available seat miles to be approximately flat to up 1% from the same period in 2023 (earlier guidance was for a decline in the 1-3% band).
The company presently expects fourth-quarter adjusted earnings per share to be between approximately 55 cents and 75 cents (earlier guidance was in the 25-50 cents range). The Zacks Consensus Estimate for the fourth quarter of 2024 is currently pegged at 41 cents per share.
Given these bullish updates, the question that naturally arises is whether investors should buy AAL stock now or wait for a better entry point. Let us delve deeper to answer the question.
Upbeat Air Travel Demand Boosts AAL Stock
The stronger-than-expected recovery of air travel demand following the pandemic has been supporting the growth of airline stocks like Delta. While air travel demand is particularly strong on the leisure front, it is heartening to note that business demand has made an impressive comeback. To meet the upbeat demand scenario, AAL is boosting its capacity.
As a reflection of the buoyant air travel demand scenario, operating revenues increased 2.1% year over year in the first nine months of 2024, driven by a 1.9% uptick in passenger revenues. With the holiday period expected to invite substantial traffic, passenger revenues are likely to be very high in the final quarter of 2024, in turn aiding its overall results.
Falling Oil Price Represents Another Positive for AAL Stock
The southward movement of oil prices bodes well for the bottom-line growth of airlines, including AAL. This is because fuel expenses are a significant input cost for the aviation space. Notably, oil prices declined 14% in the July-September period, mainly due to weakening global demand.
China's economy, the world’s largest oil importer, struggled with a slowdown in manufacturing, shrinking for the fifth consecutive month by September. In third-quarter 2024, expenses on aircraft fuel and taxes at AAL decreased 10.4% year over year to $2.88 billion.
Average fuel price per gallon (adjusted) decreased to $2.5 from $2.91 a year ago. Fuel cost per gallon for 2024 is anticipated in the range of $2.55-$2.65. We expect the metric to be $2.57 for the current year. The actual figure for 2023 was $2.96 per gallon.
AAL’s Impressive Price Performance
Driven by upbeat air travel and low fuel costs, AAL’s shares have outperformed its industry in the past three months.
Three-Month Price Comparison
Image Source: Zacks Investment Research
Trump’s Victory: Another Positive for AAL Stock
Donald Trump's re-election as the U.S. President is a favorable development for American Airlines. The anticipation of a more relaxed regulatory environment under Trump's leadership will likely lead to lesser scrutiny, which is expected to boost mergers and acquisitions in the industry. This is a positive for airline stocks, including AAL. Owing to Trump’s business-friendly stance, the Northeast Alliance between American Airlines and JetBlue Airways JBLU might return.
We remind investors that in 2023, a federal judge agreed with the U.S. Justice Department that the alliance resulted in higher prices for consumers. Consequently, both companies were ordered to part ways and end the alliance. JBLU and AAL appealed against the ruling, but a United States Appeals Court judge did not overturn the previous ruling. AAL is reviewing the ruling and considering options. The company might be hoping that with Trump in office, there is a chance for the alliance to be revived, given the expectations of a more relaxed regulatory atmosphere under his leadership.
Earnings per share estimates have been moving north in the past 60 days, owing to the positives surrounding the stock.
Image Source: Zacks Investment Research
AAL Stock’s Attractive Valuation
From a valuation perspective, AAL has been trading at a discount compared with the industry. American Airlines’ forward 12-month price-to-sales, a commonly used multiple for valuing airline stocks, reading is also below its median in the past five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
Some Hiccups for AAL
The northward movement in labor expenses is hurting AAL’s bottom line by pushing up operating costs. Operating expenses were up 5% in 2023, despite costs on aircraft fuel decreasing 11.1% year over year. Expenses on salary, wages and benefits increased 12.4% in the same period.
As a result of the deal with pilots, salaries, wages and benefits increased 9.4% year over year in the first nine months of 2024. Due to high labor costs, management expects non-fuel unit costs (adjusted) in the fourth quarter of 2024 to increase in the 5-6% band year over year.
Cargo revenues are on the decline, with the same reducing 34.1% year over year in 2023 due to a decrease in cargo yield. Cargo yield per ton mile declined 29.4% in 2023. In the first nine months of 2024, cargo revenues fell 4.7% due to the 17.4% decline in cargo yield per ton-mile.
Conclusion
Undoubtedly, AAL stock is attractively valued. Upbeat passenger volumes and low fuel costs are providing it a boost. However, high labor costs weigh on its bottom line. Declining cargo revenues are not helping matters either. As a result, we do not advise buying this Zacks Rank #3 (Hold) stock at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Instead, investors should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s current Zacks Rank supports our thesis.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
