Key learning points
- Analysts estimate adjusted EPS of -$2.06 versus -$7.82 in Q2 2020.
- The passenger load factor is expected to rise YOY, but will still be below pre-pandemic levels.
- Turnover is expected to rise sharply as passenger traffic picks up again.
American Airlines Group Inc. (AAL) saw customer demand decline during the COVID-19 pandemic as travelers chose to stay at home due to health concerns and regulations. The airline ended the first quarter of 2021 with $48 billion in debt and lease obligations, the largest in the industry. While American Airlines’ business volume improved faster than previously expected in the second quarter, the company still has a lot of ground to make up for.
Investors will closely monitor the pace of American Airlines’ recovery as the company reports its second-quarter 2021 earnings before the market opens on July 22. The news can be very mixed. Analysts estimate that American Airlines will post quarterly adjusted loss per share (EPS) for the sixth straight year, although the year-over-year (YOY) will decline dramatically. Sales are expected to improve significantly, but not at pre-pandemic levels.
One key metric investors are likely to focus on is American Airlines’ passenger load factor, a measure of airline efficiency that reflects the percentage of American Airlines’ seating capacity that is being used. Analysts predict occupancy will improve to its highest level since Q4 FY 2019. A major risk to American Airlines and other airlines may be the rapidly spreading Delta variant, the most contagious version of the COVID-19 virus. If it continues to spread, it could dampen some consumers’ enthusiasm for air travel.
Despite wild swings, American Airlines stock has risen more than twice as fast as the broader market in the past year. The stock led the market last August and then traded horizontally until October, before underperforming briefly. Thereafter, the stock rocketed from mid-November and outperformed over the past eight months through July. While stocks outperformed, they hit highs in mid-March and early June and then retreated. For example, the stock fell ahead of the first quarter 2021 earnings report and then rose to its June high. As of July 20, the company has posted a 1-year total return of 79.3%, well above the S&P 500’s total return of 32.9%.
American Airlines deserves history
Investor optimism about the emerging economic recovery has pushed American Airlines stocks higher in recent months. Earnings improvements in the latter half of FY 2020 may also have contributed. The company posted five consecutive quarters of adjusted losses per share, beginning in Q1 FY 2020. However, losses declined significantly in Q3 and Q4 FY 2020. This trend reversed in Q1 FY 2021, as adjusted losses per share both year-over-year as it increased year on year. sequential basis. Now, analysts expect another improvement for the second quarter of 2021, with American Airlines posting its smallest adjusted loss per share since the start of the pandemic. Nevertheless, this would be a long way from FY 2019 profitability.
American Airlines revenue could show an even stronger recovery in the second quarter of 2021. The company posted five consecutive quarters of YOY sales declines through the first quarter of 2021, the first declines in several years. The main YOY drop occurred in the second quarter of 2020, when sales fell by 86.4%. The following three quarters saw a gradually smaller YOY decline. Analysts are now forecasting significant improvement for Q2 FY 2021 as YOY revenue more than quadruples from its Q2 FY 2020 low. Still, Q2 FY 2021 estimated revenue is expected to fall nearly 40% compared to Q2 FY 2019, before the start of the pandemic.
|American Airlines Key Statistics|
|Estimate for Q2 FY 2021||Q2 FY 2020||Q2 FY 2019|
|Adjusted Earnings Per Share||-$2.06||-$7.82||$1.82|
The most important statistic
As mentioned, American Airlines investors will likely also be looking at the company’s occupancy rate. This important metric for the airline industry is a measure of the percentage of available seat capacity that is filled with passengers. Higher occupancy rates indicate a higher percentage of seats occupied by passengers. Airlines have roughly a fixed cost to send a plane into flight, regardless of the number of passengers on board, so there’s an incentive to fill as many seats as possible to better distribute that cost. For this reason, higher capacity utilization is a sign of greater efficiency and profitability. In the past year, however, the occupancy rate has come under strong pressure, especially as the COVID-19 pandemic has turned the above logic on its head. Fuller planes are seen as worse from a public health perspective during a pandemic. With fewer passengers traveling and lower load factors, companies like American Airlines are facing a profitability crisis.
American Airlines’ load factor has plummeted during the pandemic. During FY 2018 and FY 2019, the company’s quarterly occupancy rate fluctuated between 80% and 86%. It fell to 72.7% in the first quarter of 2020, reflecting the impact of the start of the pandemic on the latter part of the quarter. The load factor then fell to 42.3% for the second quarter, before gradually recovering in the third and fourth quarters of 2020. The load factor reversed course in the first quarter of 2021 and fell to 59.5%. That was both a sequential decline from Q4 and a YOY decline from Q1 FY 2020. Consensus estimates predict that occupancy will improve to 74.4% for Q2 FY 2021. While that would be higher than the past five quarters, this figure is yet to be seen. well below American Airlines’ pre-pandemic load factor levels.