American Airlines Q2 earnings forecast: revenue up despite falling EPS

When is the company reporting?

American Airlines (AAL) is expected to report its Q2 2024 earnings on Thursday, 25 July at 9.00PM (AEST).

What is the backdrop to the company?

Wall Street anticipates a year-over-year decline in earnings for American Airlines, despite expectations of higher revenues. Analysts project quarterly earnings of $1.05 per share, representing a 45.3% decrease from the previous year. However, revenues are forecasted to reach $14.42 billion, marking a 2.6% increase from the same quarter last year.

Key financials

• Earnings per share: $1.05, down 45.3% YoY
• Revenue: $14.42 billion, up 2.6% YoY

Highlights of the previous quarter

American Airlines faced significant challenges, with its stock price falling 13% on May 29 following a cut in its Q2 outlook. The company acknowledged losing business travel to rival airlines, partly due to its strategy of focusing on direct website sales and reducing its sales staff. This approach appears to have backfired, resulting in a loss of corporate business to competitors.

Despite these setbacks, AAL showed some financial improvements:

• Net income: $0.82 billion, up 547% YoY
• Operating margin: expanded, contributing to the net income increase
• Non-operating expenses: lower, aiding overall financial performance
• Net income margin: increased from -18.1% in 2021 to 3.5% in 2023

Stock performance and valuation

American Airlines stock has consistently underperformed the S&P 500 from 2021 to 2023. However, analysts estimate American Airlines valuation to be $16 per share, suggesting a potential upside of over 30% from its current market price of around $12. This valuation is based on a sales multiple of 0.2x, aligning with the stock's average over the last three years.

What can we look forward to in the next quarter?

Looking ahead, American Airlines expects its 2024 adjusted earnings to be between $2.25 and $3.25 per share. The company has plans for capacity expansion and debt reduction, while overall travel demand remains robust. However, American Airlines faces several near-term headwinds, including the loss of customers to rival airlines, elevated fuel prices, and lower yields. Additionally, the company's high debt level of around $40 billion remains a significant concern for investors and analysts alike.

Technical analysis

In July, American Airlines stock price fell to its lowest level since the Covid-19 pandemic, continuing the negative momentum from the gloomy update on May 29. A dip towards $10 was met by buying, but the overall bearish impression remains in place. Short-term rallies in February, March, and early May all hit fresh selling, indicating generally bearish sentiment. In the short-term, any rebound targets the mid-April low at $12.72.

Both gross and operating margins have seen significant growth since 2021, with the net income margin rising from -18.1% in 2021 to 3.5% in 2023. This expansion is primarily attributed to an increase in operating margins and a reduction in non-operating expenses.

American Airlines daily chart