Is American Airlines Stock a Buy?

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Things have been looking optimistic for the airline industry as of late. The sector got hammered ever since the pandemic hit. Now, with lockdowns and travel restrictions easing up, the sector is getting its spark back. The industry got a boost after Delta Air Lines ( DAL -3.04% ) reported earnings on April 13 with an optimistic outlook for the second quarter. Delta is gearing up to handle more demand as summer travel plans rise. 

Additional good news for the industry came in last week. In March, all major U.S. airlines’ CEOs signed an open letter and urged President Joe Biden to “end the transportation mask mandate and testing requirements for international travelers,” according to CNN. Last week, a federal judge lifted the mandate that required all passengers to wear masks.

American Airlines (NYSE: AAL) also signed the letter. Its stock closed 4% higher on April 21 after it reported strong first-quarter 2022 results. Let’s take a look at its performance in the quarter and what the year ahead looks like for the airline.

Image source: Getty Images.

American Airlines’ performance boosted the sector 

The airline’s first-quarter revenue came in on par with analysts’ expectations of $8.9 billion, which was an impressive 84% recovery from the same quarter of 2019. The airline also noted that March marked the first month when revenues surpassed 2019 levels.

Domestic business travel has increased as offices reopened in most places. As the company noted in its press release, it has received the highest number of corporate bookings ever since the start of the pandemic. International travel demand also seems to have picked up considerably. 

However, American did not see profits this quarter. Net loss for the quarter came in at $1.6 billion, or $2.52 per share. But the airline stated that looking at current demand trends, it expects to be profitable in the second quarter (based on current fuel price assumptions).

The airline ended the quarter with $15.5 billion of total available liquidity. To date, it has paid $4.1 billion in debt and plans to pay off $15 billion of debt by the end of 2025. Not to burden its balance sheet further, American Airlines has cost-effective financing in place. This is related to all its aircraft deliveries that it plans to carry out throughout the third quarter of 2022. The company is also further exploring financing options for the fourth quarter and the first half of next year. 

Are good times ahead for the airline industry?

The airlines tried to urge the president to remove the mask mandate and testing requirements in an effort to ease up travel restrictions so that demand could get back to normal.

Even though only the mask mandate has been lifted, passengers’ interest in flying seems to be growing, both for domestic and international travel, after being stuck at home for over two years. Summer travel demand is rising, as most airlines reported in their quarterly results. Deloitte’s “2022 Travel Outlook” discussed how global intent to book an international flight climbed to 23% by June 2021.

Peer Delta Air Lines also sees its revenue accelerate 93% to 97% from 2019 levels, and its operating profit margin is in the range of 12% to 14% for the second quarter. 

Southwest Airlines will report its first-quarter results on April 28. In January, the airline had discussed how it hopes to be profitable again in the first quarter. Southwest had a profitable Q4 2021 with net profits of $68 million, or $0.11 per share.

Is it a good time to buy American Airlines?

American Airlines’ recovery looks good, and it is capable to handle the demand ahead. Looking forward to the next quarter, the company expects passenger capacity to jump around 92% to 94% from second quarter 2019’s levels. The airline also hopes to see total revenue be 6% to 8% higher than in Q2 2019.

Most of the airline stocks have outperformed the industry benchmark, US Global Jets ETF‘s gain of 8%, so far this year.

AAL data by YCharts

However, despite how attractive airline stocks look right now, the sector is still volatile. A lot of external factors could still affect demand and profits. That said, the sector has started to recover, and demand could go back to pre-pandemic levels or even higher, but that could take a while.

It is still soon to say that the pandemic is behind us. So investors interested in this sector might have to hold on to their stocks for the long haul to earn any fruitful returns.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.