Here's Why Investors Should Retain American Airlines (AAL)
American Airlines Group Inc. AAL is benefiting from broadening network and debt-reduction efforts. However, weak guidance is worrisome.
Factors Favoring AAL
American Airlines’ debt-reduction efforts are impressive as well. Management aims to reduce its debt by $15 billion by 2025 end. The company aims to attain this objective through naturally occurring amortization. Also, it intends to utilize surplus cash and free cash flow to pay down prepayable debt. As of Jun 30, 2023, the carrier reduced its debt levels by more than $9 billion from peak levels in mid-2021.
American Airlines is constantly looking to add routes and broaden its network. As part of the expansion drive, the carrier connected Seattle, WA with Bengaluru in 2022. The agreement inked with Gol Linhas in 2022 is another positive.
The agreement inked last year with Boom Supersonic to purchase up to 20 Overture planes from the latter is aimed at modernizing its fleet. The agreement also includes the option for AAL to buy 40 more such high-speed jets.
Some Risks
American Airlines’ management stated that “fuel prices have increased considerably since the company’s initial third-quarter guidance issued on Jul 20, 2023.” The company now expects fuel cost per gallon (inclusive of taxes) to be in the $2.90-$3.00 band (the earlier guidance was in the $2.55-$2.65 range). AAL now expects total revenue per available seat miles (a measure of unit revenue) to decline 5.5-6.5% from third-quarter 2022 actuals (earlier estimate was a 4.5-6.5% decline). Fuel gallon consumption is now estimated to be $1,100 million for the quarter (the earlier view was $1,090 million).
Apart from high fuel costs, the increase in labor costs, due to the deal with pilots, is also a reason for the guidance cut. The deal has provisions for retroactive pay, as a result of which $230 million will be reflected as additional expenses in the September-quarter results. This retroactive expense is expected to impact the third-quarter adjusted operating margin by approximately 1.7 points. Operating margin is now expected to be in the 4-5% band (earlier expectation was 8-10%).
High labor and fuel costs prompted management to lower its third-quarter earnings per share (excluding net special items) view to the range of 20-30 cents from 85-95 cents expected earlier.
Zacks Rank
AAL currently carries Zacks Rank #3 (Hold).
Key Picks
Some better-ranked stocks for investors interested in the Zacks Transportation sector are FedEx Corporation FDX and Ryder System R.
FDX’s consistent efforts to reward shareholders through dividends and buybacks are encouraging. It presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
FedEx's liquidity position is also impressive. To navigate the weaker-than-expected business environment, FDX is cutting costs.
Ryder, which currently sports a Zacks Rank of 1, is benefiting from its consistent efforts to reward shareholders through dividends and share repurchases.
Despite weak market conditions, Ryder reported better-than-expected earnings in second-quarter 2023. In fact, the company has an impressive earnings surprise history. R has surpassed the Zacks Consensus Estimate in three of the last four quarters (missing the mark once), the average beat being 11.2%.
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Ryder System, Inc. (R) : Free Stock Analysis Report
FedEx Corporation (FDX) : Free Stock Analysis Report
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
