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Shares of the Fort Worth, TX-based American Airlines Group (AAL - Free Report) have rallied 10.3% in the last one month comfortably outperforming the Zacks categorized Transportation-Airline industry’s gain of 1.4%.


Let’s Delve Deeper

The stock has been boosted by the improving trends with respect to unit revenues. American Airlines expects to perform well on the unit revenue front for the rest of 2017. While announcing its April traffic report last month, the carrier raised its views on total revenue per available seat mile (TRASM: a key measure of unit revenues) and pre-tax margin (excluding special items) for the second quarter of 2017. TRASM is projected to increase in the band of 3.5% to 5.5% on a year-over-year basis in the second quarter (old guidance had hinted at growth in 3% to 5% range) .

Notably, the company had performed well in the first quarter as well with respect to TRASM. In fact, the metric had improved 3.1% in the quarter. In fact, this was the second successive quarter in which the metric grew on a year-over-year basis, since the fourth quarter of 2014.  Pre-tax margin (excluding special items) is now expected in the range of 12% to14% (old guidance: 11% to 13%).

Also, the company’s efforts to expand are quite impressive. To this end, American Airlines purchased a minority stake in China Southern Airlines (ZNH - Free Report) earlier this year. We believe the move to expand in China is a prudent one, as this country is anticipated to become the largest aviation market by 2024. Additionally, American Airlines’ efforts to reward shareholders raise optimism in the stock. Attempts to modernize its fleet are encouraging as well.

Evidently, these bullish factors have contributed to the Zacks Consensus Estimate climbing 4.4% in the last month to $1.66 per share.

However, escalated costs are expected to limit bottom-line growth in the second quarter of 2017 similar to the previous quarter. The recent labor deals inked by the company have resulted in a surge in labor costs. Also, the wage hike announcement for pilots and flight attendants in Apr 2017 is likely to pressurize the bottom line further.  In a bid to match the industry leading levels in this respect, the carrier offered its pilots and flights attendants a pay rise to the tune of approximately 8% and 5%, respectively. Apart from escalating labor costs, the increase in fuel expenses is also expected to dampen bottom-line growth.

Consolidated CASM (excluding special items and fuel) for the second quarter is anticipated to increase 7%. CASM (mainline) is expected to grow in the band of 6% to 8%. On the regional front, it is projected to grow in the 3% to 5% range.  Furthermore, American Airlines’ high debt levels raise concerns.

In view of the above challenges, we would advise investors to wait for a better entry point before accumulating shares of this Zacks Rank #3 (Hold) company.

Stocks to Consider

Better-ranked stocks in the airline space include United Continental Holdings (UAL - Free Report) and Ryanair Holdings (RYAAY - Free Report) sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

We note that shares of Ryanair and United Continental have gained 28.2% and 9.3%, respectively, on a year-to-date basis.

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