American Airlines Earnings: As Fleet Grows, So May Risk of Chasing Share

American Airlines Stock at a Glance

• Fair Value Estimate: $11.50
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

American Airlines Earnings Update

American Airlines AAL reported robust second-quarter results on July 20 that slightly surpassed our expectations for passenger revenue but also outstripped our estimates for labor and maintenance costs, especially over the coming quarters. We have lowered our fair value estimate to $11.50 per share from $12.20.

As this busy and nearly fully booked summer unfolds, we see the seeds of our longer-term thesis playing out. As long as industry capacity is constrained by pilot hiring, delayed delivery of planes from Boeing, and capacity cutbacks imposed by shortages of air traffic controllers at the Federal Aviation Administration—all of which affect U.S. airlines essentially equally—we see the existing competitive dynamics as stable and revenue yields and booking rates boosted across the board.

Meanwhile, as airlines continue to plot their capacity expansion beyond 2019 levels, spending billions on airport upgrades and new planes, they are also renegotiating their labor agreements with pilots, flight attendants, and other employee groups. This is beginning to add costs as their wage agreements catch up to the cost of living and other adjustments. Low fuel prices and unusually full planes will pay for these increases in wages and capacity, but once either wavers we expect lower profitability and the return of risky price competition.

We give American Airlines full credit for its renewed fleet and relatively low need for capital expenditure, and we forecast healthy profits and eventual deleveraging of the balance sheet over several years. We’ve decreased our Morningstar Uncertainty Rating to High from Very High because the current operating environment is so favorable, and for the time being, it would warrant less margin of safety for the (albeit overvalued) stock. The change was also informed by a quantitative methodology to help calibrate our fundamentals-based assessments of uncertainty across a broad universe of stocks.