What’s Happening With American Airlines Stock?

American Airlines stock (NASDAQ: AAL) currently trades at $11 per share, nearly 60% below its highs of $26 seen in June 2021.  In comparison, its peer – United Airlines stock (NASDAQ:UAL) – is down 22% over this period. Most of the U.S. airline stocks have been weighed down as they cut their outlook for 2024 early this year amid higher costs and pricing woes. American Airlines saw its stock trading at around $13 in June 2022 just before the Fed started increasing rates, and is still 16% below that level. In comparison, the broader markets have rallied, with the S&P 500 index up 48% over this period. 

While AAL stock has been trending lower over a three-year period, the decrease has been far from consistent. Returns for the stock were 14% in 2021, -29% in 2022, and 8% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that AAL underperformed the S&P in 2021, 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrial sector including MMM, HON, and BA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AAL face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months — or will it see a recovery?  Returning to the pre-inflation shock level of $26 implies that AAL stock will have to gain around 150% from here, and we don’t think it will materialize anytime soon. We estimate American Airlines’ valuation to be $12 per share – reflecting an upside of around 15% from its current price of under $11. Our forecast is based on an 11x P/E multiple for AAL and expected earnings of $1.09 on a per-share and adjusted basis for the full year 2024. The company has guided for adjusted EPS to be in the range of $0.70-1.30 for the full year 2024.

Our detailed analysis of American Airlines’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen since 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how AAL stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

AAL and S&P 500 Performance During 2007-08 Crisis

AAL stock declined from nearly $26 in September 2007 (pre-crisis peak) to below $3 in March 2009 (as the markets bottomed out), implying AAL stock lost almost 90% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $5 in early 2010, rising 70% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

AAL Fundamentals Over Recent Years

American Airlines’ revenues have been trending higher, up from $29.9 billion in 2021 to $53.4 billion over the last twelve months period. Airlines at large have seen a strong rebound in air travel demand after the pandemic. Despite higher revenue, the company is still under loss. Although it did see positive earnings in 2022 and 2023, increased costs have weighed on its bottom line lately. For the last twelve-month period, the company’s reported loss per share stood at $0.18 per share. 

Does AAL Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

American Airlines’ total debt decreased from $46.2 billion in 2021 to $39.4 billion now, while its total cash decreased from around $12.4 billion to $8.4 billion over the same period. The company also garnered $2 billion in cash flows from its operations in the last twelve months. Given the decline in its stock price over the recent years, the company’s market capitalization has shrunk to just $7 billion. With debt levels of around $39 billion, its debt-to-equity ratio has ballooned to over 500%. The high debt burden is a near-term risk that the company faces.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe American Airlines (AAL) stock has the potential for gains once fears of a potential recession are allayed. That said, the pressure on the company’s balance sheet, and the impact of rising costs on the company’s profitability, remains a significant risk factor to realizing these gains.

[1] Returns as of 9/2/2024
[2] Cumulative total returns since the end of 2016