- American Airlines(AAL) stock is up more than 10% in early afternoon trading.
- The company expects to report its first pretax quarterly profit since the start of the pandemic.
- AAL stock reflects growing enthusiasm, although investors should consider the quality of earnings.
Source: GagliardiPhotography / Shutterstock.com
Few other industries have suffered as catastrophic of a collapse as air travel. That makes the recent news forAmerican Airlines(NASDAQ:AAL) stock that much sweeter. For the upcoming second quarter, management expects to post itsfirst pretax profitsince the start of the pandemic. Robust demand has bolstered the airline industry, leading to AAL stock gaining nearly 10% so far today.
Like AAL, analysts expect many major U.S. airlines to post some of their strongest earnings since Covid-19. One of the main catalysts behind this resurgence is revenge travel, or the pent-up demand of consumers. Better yet, this increase in bookings is helping mitigate mounting costs. That factor is likely playing into the bullishness for AAL stock.
American Airlines expects total revenue per available seat mile to be up about 22.5%, reflective of a lower-than-planned capacity. However, the company and underlying sector’s pricing power is gaining momentum. Citi analyst Stephen Trent says the following:
“American Airlines’ overall guidance looks modestly positive, with revenue stronger than expected, even though ex-fuel seat mile cost and jet fuel kerosene expense pressure look a little worse than expected.”
Quality of Earnings and AAL Stock
After the unprecedented downfall of the airline industry — whenload factorfor U.S. carriers slipped to 13.7% at one point — these expected pretax profits have inevitably lifted AAL stock.
Management anticipates pretax income of $585 million in Q2. The company also expects quarterly revenue to rise by approximately 12% to $13.39 billion. Before, management had forecasted Q2 revenue to increase between 11% and 13%.
That said, not every element of the company’s disclosure has positive implications. PerReuters, American Airlinesexpects“fuel expenses to average between $4.00 and $4.05 per gallon compared with its previous forecast of $3.92 to $3.97 per gallon.” Therefore, a waiting game may develop as analysts look for clues as to whether the rise in bookings amid soaring inflation is sustainable.
This matter speaks to concerns regardingquality of earningsor earnings-absent anomalies, accounting tricks or one-time events (such as the revenge travel phenomenon). In other words, earnings quality focuses on the predictability value that the current earnings trajectory imparts on the underlying company’s future business.
Here, the narrative encounters some turbulence. Theerosion of real household earningswill become inextricably problematic if the Federal Reserve fails to ease inflation.
Why It Matters
Throughout this year, a confluence of negative events — inflation, Russia’s war with Ukraine, supply-chain disruptions and other incidents — have contributed to the rapid erosion ofconsumer sentiment. That makes the fact that AAL stock is spiking higher incredibly encouraging, reflecting the possibility of a turnaround.
Nevertheless, it’s difficult to ignore other factors. For example, over the trailing five-year period, AAL stock has tanked more than 72%. American Airlines still has a long road ahead. However, it’s clear from today’s price action that some investors are ready to book their flight to recoveryfar in advance.
Comments