American Airlines: The No. 1 Reason to Be Bullish on American Airlines Stock

American AirlinesGood News for American Airlines Stock

Since the start of last February, American Airlines Group Inc (NASDAQ:AAL) has seen its most consistent rise on Wall Street in at least a year. American Airlines stock was cruising comfortably above $43.00 on Friday. Ostensibly, as happens for other major airlines, American Airlines stock benefits when oil prices drop. Therefore, the entire airline industry should see significant gains in 2016.

The International Air Transport Association (IATA) has predicted airlines to generate $36.3 billion in net profits in 2016. (Source: “IATA chief: Airline profitability is good for all,” Air Transport World, February 25, 2016.) Even in such a context and surrounded by some of the world’s best sector players, American Airlines stands out.

American Airlines has enjoyed enviable earnings-per-share (EPS) growth, consistently beating analysts’ forecasts in 2015. (Source: “American Airlines Group, Inc. Earnings Per Share,” NASDAQ web site, March 21, 2016.) In its latest quarter, AAL stock reported yet another record for profits, the ninth ever such achievement since it merged with US Airways in 2013. (Source: “American Airlines Group Reports Record First Quarter 2015 Profit,” American Airlines Group Inc, January 29, 2016.)

Skeptics will have to revise their predictions upward because AAL stock is on its way to delivering another record quarter. That is what the February traffic numbers suggest, at least. Consolidated traffic at American Airlines rose 4.7% from the same month of 2015, with an eight-percent increase in capacity. The average occupancy rate of the group of companies was 77%, slightly down by 2.3 points compared to the same month in 2015.

The much lower fuel costs will more than compensate from the earnings per seat mile perspective. Interestingly, despite the high U.S. dollar, international traffic was up 3.2% compared to February 2015, with capacity up 6.6%. This is significant, because analysts expected the low dollar to account for lower international revenue. (Source: “American Airlines reports record February passenger traffic,” The Dallas Morning News, March 8, 2016.)

The increased traffic and profitability is self-perpetuating. American Airlines can add stock value by investing in more profitable routes, generating new traffic and revenue. It is also improving its passenger service, building new lounges at some of its key U.S. hubs. American Airlines has been one of the first airlines among U.S. majors to apply for the rights to fly to Cuba. The airline is especially keen on expanding in the Asia-Pacific region, where demand for air travel is growing fastest.

The big push began last Christmas, as American Airlines launched new nonstop flights between Los Angeles and Sydney. In February, it launched new flights to Tokyo’s Haneda Airport (it already has a flight to Tokyo Narita). Before the summer, AAL will also add Auckland, New Zealand to its route map in June and Hong Kong in September. (Source: “American Airlines expands Asia presence with new Los Angeles to Hong Kong flight,” The Dallas Morning News, March 8, 2016.)

American Airlines is also taking advantage of the rise in popularity of low-cost commercial carriers (LCC). LCCs like Spirit Airlines have capitalized on their ability to undercut competitors thanks to an aggressive cost structure and lower-than-average fares. Holders of American Airlines stock can rest assured that not only is the company catching up with LCC fare offerings, but it is also matching their prices and potentially even beating them in some circumstances.

The Bottom Line on American Airlines Stock

In October, during an enviably good quarterly results presentation, American Airlines announced the establishment of a new fare level to help confront competition from low-cost carriers like Spirit. American Airlines stock gained, as it was propelled back to the mid-$40.00’s. Scott Kirby, American Airlines’ CEO, said the new fare would be marketed in 2016, without providing much more detail. (Source: “American Airlines to offer cheap fares to compete with low-cost carriers,” LA Times, November 1, 2015.)

American Airlines’ new low-cost product will include “less services,” but it will also come at a “really low price.” It will, however, only be available on routes where American Airlines has to fight against a competitor such as Spirit. Overall, American Airlines is experiencing a perfect storm of strengths that could push American Airlines stock back to its historic highs in the $55.00 range or higher.