American Airlines (NASDAQ: AAL) experienced a 13% drop in stock price on May 29, following a reduction in its second quarter outlook and acknowledgment of losing business travel to rival airlines. This contrasted with United Airlines stock (NASDAQ: UAL), which rose by 2% on the same day. American Airlines had focused on its website for sales and reduced its sales staff post-pandemic, resulting in a loss of corporate business to competitors.
Over the last three years, American Airlines saw a significant increase in net income by $0.7 billion or 547% year-over-year to $0.82 billion in 2023. This growth was primarily driven by an expansion of its operating margin and lower non-operating expenses. However, despite this improvement, AAL stock underperformed the S&P 500, with returns of 14% in 2021, -29% in 2022, and 8% in 2023, compared to the S&P 500’s returns of 27%, -19%, and 24% over the same period.
Many individual stocks, including heavyweights in the Industrials sector and popular companies like Google, Tesla, and Microsoft, have struggled to outperform the S&P 500 consistently in recent years. In contrast, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year during the same period. American Airlines is currently facing challenges in the uncertain macroeconomic environment, but it has potential for growth with a projected valuation of $16 per share, indicating a 30% upside over its current market price of around $12.
American Airlines witnessed an expansion of gross and operating margins in recent years, with gross profit increasing from $27 million in 2021 to $11.8 billion in 2023. The operating margin also improved from -16.9% in 2021 to 7.6% in 2023. Despite an increase in SG&A expenses, which rose by 64% between 2021 and 2023, it was lower than the 77% rise in total revenues. The company’s net income margin has also expanded from -18.1% in 2021 to 3.5% in 2023, driven by increased sales but hindered by a high debt level of around $40 billion.
Looking ahead, American Airlines expects its 2024 bottom line to range from $2.25 to $3.25 on an adjusted basis. The company aims to expand capacity, reduce debt, and capitalize on robust travel demand for future growth. However, near-term challenges include loss of customers to competitors, high fuel prices, lower yields, and a significant debt burden, reflected in a debt-to-equity ratio of over 500%. With a 15% decline in stock price this year, American Airlines faces uncertainties but also opportunities for recovery and improved performance.
