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Here's Why You Should Retain American Airlines (AAL) Stock

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

Factors Favoring AAL

The gradual improvement in air-travel demand is a huge boon for Delta, which currently carries a Zacks Rank #3 (Hold). Owing to this tailwind, the June quarter of 2022 was the first profitable period, excluding net special items, at AAL since the onset of the pandemic.

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

Driven by strong air-travel demand, passenger revenues surged to $12,223 million in the June quarter from $6,545 million a year ago. Banking on healthy bookings, management expects AAL to deliver a profit in the September quarter too. Total revenues in the third quarter of 2022 are anticipated to be roughly 10-12% higher than the level recorded in third-quarter 2019. Management expects Total revenues per available seat miles (TRASM: a key measure of unit revenue) to be 20-24% higher than the third-quarter 2019 actuals.

With air-travel demand having improved, American Airlines is constantly looking to add routes and broaden its network. Management's focus on generating cargo revenues is encouraging and is supporting its top-line growth. Evidently in 2021, cargo revenues increased 70.8% year over year with cargo yield per ton mile moving 13.7% northward. In first-half 2022, cargo revenues improved 7.8% to $692 million, driven by the carrier’s focus on its cargo unit in the coronavirus era. Cargo yield per ton mile rose 13.1% in the period.

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 second-quarter 2022, fuel price per gallon climbed to $4.03 from $1.91 a year ago. Fuel cost per gallon in third-quarter 2022 is expected in the $3.73-$3.78 band. The midpoint of the guided range is much higher than the third-quarter 2021 actuals of $2.07.

American Airlines expects second-quarter 2022 capacity to decline in the 8-10% range from the third-quarter 2019 actuals. For 2022, capacity is expected to decline 7.5-9.5% from the 2019 levels. Due to low capacity, CASM (cost per available seat miles), excluding fuel and special items, is high and is expected to increase 12-14% in third-quarter 2022 from the third-quarter 2019 actuals.

With airlines having trimmed their labor force substantially during the peak of the pandemic, the airline industry is grappling with a staffing crunch as demand bounces back and AAL is no exception.

Key Picks

Some better-ranked stocks in the Zacks Transportation  sector are SkyWest (SKYW - Free Report) and C.H. Robinson (CHRW - Free Report) .

Continued recovery in air-travel demand bodes well for SkyWest. With an improvement in air-travel demand, SKYW carried 32.7% more passengers in first-half 2022 than the year-ago level. As a result, the passenger load factor (percentage of seats filled by passengers) expanded 1450 basis points to 82.1% in first-half 2022.

SKYW’s fleet-modernization efforts are commendable as well. The positivity surrounding the stock is evident from the Zacks Consensus Estimate for current-year earnings being revised above 100% upward over the past 60 days. SkyWest has a Momentum Style Score of A. SKYW currently sports a Zacks Rank #1.

C.H. Robinson is being aided by an improving freight scenario in the United States. Efforts to control costs also bode well. Measures to reward CHRW's shareholders instill confidence in the stock further.

CHRW has a pleasant earnings track record. The bottom line surpassed the Zacks Consensus Estimate in three of the trailing four quarters (missing the mark in the remaining one). The stock has witnessed the Zacks Consensus Estimate for 2022 earnings being revised 17.6% upward over the past 60 days. C.H. Robinson currently carries a Zacks Rank #2 (Buy).

In-Depth Zacks Research for the Tickers Above

One ticker, your choice, absolutely free ($25 value):

C.H. Robinson Worldwide, Inc. (CHRW) - free report >>

American Airlines Group Inc. (AAL) - free report >>

SkyWest, Inc. (SKYW) - free report >>

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