American Airlines Posts Solid Q2 Earnings as the Network Remains Constrained by Labor Shortages

No-moat-rated American Airlines (AAL) posted a decent second quarter as demand for air travel surges but all major U.S. carriers remain constrained by labor shortages. Revenue of $13.4 billion beat FactSet consensus estimates by 0.7%, but earnings per share of $0.76 missed these estimates by 0.7%. We are increasing our fair value estimate to $19.50 per share for American from $19 as we increase our near-term profitability targets but temper our midcycle operating margin downward to reflect less structural cost improvement.

Passenger revenue came in 11.0% higher than 2019 levels on capacity that is 8.5% lower than 2019 levels, load factors that are 30 basis points higher than 2019 levels, and yields that are 20.9% higher than 2019 levels. Management indicated that leisure demand is now above 2019 levels and business revenue is above 2019 levels as well, though the higher yields have an impact on this statistic. We are slowing down our near-term capacity outlook to reflect pilot shortages, but we are still anticipating American will recover capacity to 2019 levels in 2023. Yields increased primarily because of higher oil prices, but also reflect excess travel demand relative to capacity due to worker shortages. We’re anticipating yield declines in 2023 and 2024 as we decrease our assumed fuel prices to midcycle levels.

Unit costs excluding fuel costs and special items came in at 12.68 cents per seat mile, 11.8% higher than 2019 levels. Much of the higher unit costs reflect the smaller network and we’re assuming unit costs will continue to decrease with increased capacity.