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Here's Why Investors Should Retain American Airlines (AAL) Now

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The uptick in air-travel demand in the United States (particularly on the leisure front) bodes well for American Airlines (AAL - Free Report) . However, escalated fuel costs are limiting bottom-line growth and acting as a primary headwind.

Factors Favoring AAL

The gradual improvement in air-travel demand in the United States is a huge boon for American Airlines, which currently carries a Zacks Rank #3 (Hold). Owing to this tailwind, the carrier upped its revenue outlook for second-quarter 2022.

Backed by upbeat air-travel demand and favorable pricing, American Airlines expects total revenues to rise between 11% and 13% from the second-quarter 2019 actuals (earlier expectation was an increase in the 6- 8% range). Total revenue per available seat miles (TRASM: a measure of unit revenue) is now anticipated to be 20-22% higher than the second-quarter 2019 reading (the earlier estimate was a 14-16% rise). Driven by upbeat demand, the pre-tax margin, excluding net special items, is projected in the 4-6% range compared with the 3-5% band expected earlier.

Betterment of cargo revenues (up 70.8% year over year in 2021) is positive. In first-quarter 2022, cargo revenues improved 15.4% to $364 million. Cargo yield per ton mile rose 14.6% in the first quarter of 2022. AAL's debt-reduction efforts are impressive as well. Management aims to reduce its debt by $15 billion by 2025-end. The company aims to attain this objective through naturally occurring amortization. Also, it intends to utilize surplus cash and free cash flow to pay down prepayable debt. As of Mar 31, 2022, AAL reduced its debt levels by $4.1 billion from peak levels in the second quarter of 2021.

Key Risks

Escalating fuel costs pose a threat to American Airlines’ bottom line. Oil price is moving north, primarily because of supply concerns stemming from Russia's invasion of Ukraine. In first-quarter 2022, fuel price per gallon climbed to $2.80 from $1.70 a year ago. Management expects average fuel cost per gallon in the $3.92-$3.97 range during the June quarter.

AAL’s liquidity position remains a concern. American Airlines’ current ratio (a measure of liquidity) at the end of first-quarter 2022 stood at 0.81. A current ratio of less than 1 is not desirable as it implies that the company doesn't have enough liquid assets to cover its short-term liabilities. High non-fuel unit costs do not bode well.

Stocks to Consider

Some better-ranked stocks in the broader Zacks Transportation sector are Ryder System (R - Free Report) , C.H. Robinson Worldwide (CHRW - Free Report)  and GATX Corporation (GATX - Free Report) .

Ryder beat earnings estimates in each of the trailing four quarters, the average surprise being 48.2%. R is benefiting from improving economic and freight conditions in the United States.

Revenues in all segments grew (on higher rental revenues, new business and favorable pricing) in first-quarter 2022. R currently carries a Zacks Rank #2 (Buy).

The expected long-term (three-to-five years) earnings per share (EPS) growth rate for C.H. Robinson is pegged at 9%. Improving freight market conditions is aiding CHRW.

In first-quarter 2022, the top line improved 41.8%, owing to favorable truckload pricing for customers and handsome profits in ocean freight. CHRW currently sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

GATX beat earnings estimates in each of the trailing four quarters, the average surprise being 40.1%. The gradual improvement in the North American railcar leasing market is a huge positive for GATX.

Driven by the upsides, the stock has risen 7.1% in the past year.  GATX currently has a Zacks Rank of 2.