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American Airlines’ share price on watch ahead of Q1 earnings

American Airlines’ share price is still down close to 25% over the past one year. Can the recovery in travel demand aid to lift its share price ahead?

When does American Airlines report earnings?

American Airlines (AAL) is set to release its quarter one (Q1) financial results on 21 April 2022, before market opens.

American Airlines’ earnings – what to expect

Current expectations are for AAL’s upcoming Q1 revenue to come in at $8.8 billion, up 120% year-on-year. In addition, overall net losses are expected to be pared down further to $1.6 billion in Q1, from $2.7 billion a year ago.

Continued improvement in air passenger mobility to drive top-line recovery

As Covid-19 risks increasingly take a backseat and vaccine booster shots are largely being administered, the general direction is clearly leaning towards further reopening of borders ahead. With close to 90% of AAL’s top-line pegged to passenger travel, the data to watch may be the US TSA checkpoint travellers throughput, which seems to correlate well with AAL’s revenue. Based on the data, a recovery in travellers’ numbers in February and March has offset the dent in January from the Omicron surge, which suggests further room for recovery towards pre-Covid-19 levels, with current travellers’ throughput close to 90% of 2019's level. Pent-up travel demand lifting traveller’ numbers above pre-Covid level remains a likely possibility in the near-term as well. This will continue to underpin AAL’s revenue, with expectations for the recovery trend to last till quarter three (Q3) 2022.

A closer look at other performance metrics also suggests that the recovery has been largely underway. The passenger load factor, which measures the percentage of available seats that are filled with paying passengers, currently stands at 80.2% as of the latest quarter, just a slight margin below the pre-Covid level of 83.8%. The revenue passenger miles also came in at 83% of 2019’s levels. While there are still some gaps to cover, the worst-is-over stance for the collapse in travel demand seems to be a thing of the past. That said, the challenge for AAL lies in managing its costs in order to revert back to profitability, with its previous quarter’s earnings still slipping into the red.

Spike in fuel prices and increasing labour costs pose headwinds for airlines’ earnings

While recent Brent crude prices have come off from its multi-year high, it remains elevated above $100 a barrel, which translate directly into upside risks for aviation turbine fuel (ATF) prices. For AAL, fuel expenses account for more than 20% of its total operating expenses as of the previous quarter. With no signs of easing on the geopolitical front anytime soon, it seems that high fuel prices will continue to put a squeeze on the firm’s margins, with the highly-competitive nature of the airline industry posing difficulty in passing rising costs fully to end-consumers. AAL has been one of the major US airlines which has shunned fuel hedging, which may leave them more vulnerable to any increase in fuel costs as compared to other airlines, which are at least partially hedged.

Labour costs account for another lion share (31.4%) of AAL’s operating expenses. As hiring ramps up and wage growth remains well above its pre-pandemic trend, labour costs as of quarter four (Q4) 2021 have increased 24.4% from a year ago. For now, one may find relief that the top-line growth on the back of the travel recovery is still towering above the growth in operating expenses. The key risk will come when pent-up travel demand eventually slows while labour costs will remain persistently high in light of the workers’ supply shortages.

Currently, the stock has three ‘buy’ recommendations, 13 ‘holds’ and five ‘sells’. The Bloomberg 12-month consensus target price of $17.45 suggests a potential upside of 1.9%, from the price of $17.13 at the time of writing.

American Airlines’ shares – technical analysis

From its technicals, a downward trendline seems to be in place since June 2021, which may remain a key resistance line to overcome in order to suggest a more sustaining shift in sentiments to the upside. While it is still too early to conclude, a potential inverse head-and-shoulder pattern could be in formation, with any upside at current point completing the last stretch of its right shoulder. If it plays out, the neckline will remain closely watched, which coincidently lies with the downward trendline. This will leave the $18.54 level in focus ahead. Near-term support may be at the $16.18 level, where prices have been supported on at least four previous occasions.

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