Which Airlines Stock Will Offer Better Returns – American Or United?

Given its better prospects, we believe United Airlines stock  (NASDAQ: UAL) is a better pick than its peer, American Airlines stock (NASDAQ: AAL). AAL is trading at a slightly lower valuation of  0.2x revenues than 0.3x for UAL. Investors have assigned a higher multiple to United Airlines stock due to its superior revenue growth and comparatively better financial position, as discussed below.

Interestingly, AAL stock has had a Sharpe Ratio of -0.2 since early 2017, lower than 0.0 for UAL and 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

If we look at stock returns, United Airlines, with 13% returns this year, has fared better than American Airlines, up 0%, and the broader S&P 500 index, up 11%. There is more to the comparison, and in the sections below, we discuss why we believe UAL will offer better returns than AAL in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of American Airlines vs. United Airlines: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. United Airlines’ Revenue Growth Is Slightly Better

• United Airlines’ revenue growth has been slightly better, with a 26% average annual growth rate in the last three years, compared to 25% for American Airlines.
• The rise in revenues for both airlines over the recent years can be attributed to a rebound in air travel demand, with passenger traffic and ticket yield rising meaningfully in the recent past.
• For perspective, American Airlines’ available seat miles (ASM) declined 25% between 2019 and 2021 but surged 21% y-o-y in 2022. Similarly, its passenger revenue per available seat mile (PRASM) fell 18% between 2019 and 2021 but rose 41% y-o-y in 2022.
• In comparison, United Airlines’ ASM decreased 27% between 2019 and 2021 before rising 39% y-o-y in 2022. Its PRASM declined 19% and increased 43% over the same period, respectively.
• Looking at the last twelve months, United Airlines’ 43% sales growth has fared better than 30% for American Airlines.
• Our American Airlines Revenue Comparison and United Airlines Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, United Airlines will likely see slightly better sales growth than American Airlines. Both companies will likely see their sales rise at a low single-digit average annual growth rate to around $56 billion in three years, based on Trefis Machine Learning analysis.

2. American Airlines Is More Profitable 

• American Airlines’ reported operating margin slid from 7% in 2019 to -60% in 2020 before recovering to 3% in 2022. In comparison, United Airlines’ operating margin fell from 9% in 2019 to -49% in 2020 but rose to 2% in 2022.
• Looking at the last twelve-month period, American Airlines’ operating margin of 9% fares better than 5% for United Airlines.
• However, both airlines will likely face pressure on margins with oil prices rising to their ten-month high now. Also, both airlines have recently closed negotiations with pilots, agreeing to an increase in pay by 40% for UAL and 46% for AAL over the next four years. ^{[1] [2]}
• Our American Airlines Operating Income Comparison and United Airlines Operating Income Comparison dashboards have more details.

3. United Airlines Is Comparatively A Less Risky Pick

• Looking at financial risk, United Airlines fares better. Its 214% debt as a percentage of equity is lower than 410% for American Airlines, while its 26% cash as a percentage of assets is higher than 18% for the latter, implying that United Airlines has a comparatively better debt position and more cash cushion.
• The high debt-to-equity figures for both airlines can be attributed to much higher debt levels compared to their market capitalizations ($8 billion for AAL and $14 billion for UAL).
• American Airlines’ total debt increased from $24.3 billion in 2019 to $38.1 billion in 2022, while its total cash increased from around $4.0 billion to $13.4 billion over the same period. However, the rise in cash balance is primarily due to additional debt raised, as heavy negative operating cash flows in 2020 of $6.5 billion almost completely wiped out positive operating cash flows in 2019, 2021, and 2022.
• In comparison, United Airlines’ total debt increased from $15 billion in 2019 to $31 billion in 2022, while its total cash increased from around $2 billion to $9 billion over the same period. However, the rise in cash balance is partly due to additional debt raised, given the $4 billion negative operating cash flows in 2020.

3. The Net of It All

• We see that United Airlines has seen superior revenue growth and has a better financial position. On the other hand, American Airlines is more profitable.
• However, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe United Airlines will likely offer better returns over the next three years, primarily due to its slightly better-expected revenue growth.
• If we compare the current valuation multiples to the historical averages, both appear to have equal upside. American Airlines stock trades at 0.2x sales compared to its last five-year average of 0.4x, and United Airlines stock trades at 0.3x revenues vs. the last five-year average of 0.6x.
• Our American Airlines (AAL) Valuation Ratios Comparison and United Airlines (UAL) Valuation Ratios Comparison have more details.
• The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 5% for American Airlines and 10% return for United Airlines over this period, based on Trefis Machine Learning analysis – American Airlines vs. United Airlines– which also provides more details on how we arrive at these numbers.
• Although we believe UAL is a better pick over AAL, we acknowledge that 10% returns for UAL isn’t great. There are better opportunities over UAL stock. Our Better Bets Than UAL Stock dashboard details S&P500 stocks that can offer better returns in the next three years.

While UAL may outperform AAL in the next three years, it is helpful to see how American Airlines’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 9/27/2023
[2] Cumulative total returns since the end of 2016

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1. American Airlines Pilots Ratify Contract Offering Big Raises, Niraj Chokshi, Aug 21, 2023, The New York Times [↩]
2. Pay to Rise as Much as 40% in Deal Reached by United and Pilots, Ivan Penn, Jul 16, 2023, The New York Times [↩]