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Why Hold Strategy is Apt for American Airlines (AAL) Now

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We issued an updated research report on key airline player, American Airlines Group Inc. (AAL - Free Report) , on Sep 7.

Notably, the company’s efforts to expand are encouraging. To this end, American Airlines purchased a minority stake in China Southern Airlines Company Limited (ZNH - Free Report) . Also, the carrier has invested approximately $200 million in the Hong Kong-listed shares of China Southern. We believe, this particular move to expand in China is a prudent one as the country is projected to become the largest aviation market by 2024.

American Airlines’ also made efforts to expand its European footprint. Last month, the company announced new flights to Europe in a bid to meet the surge in demand for Europe travel during summer. In addition, the carrier is likely to offer special summer services to Budapest and Prague from Philadelphia along with an additional one to Venice from Chicago, beginning May 4, 2018.

We are impressed by American Airlines' efforts to modernize its fleet as well. The company intends to spend approximately $4.1 billion this year toward upgrading its fleet.

Moreover, the carrier is making efforts to reward shareholders through share buybacks and dividend payments, which is a positive. Evidently, it has already returned more than $10.7 billion to stockholders through share repurchases and dividends since mid-2014.

High labor costs, however, remain a major headwind for the stock that is expected to continue in the third quarter as well. Consolidated cost per available seat miles (excluding special items and fuel) is projected to increase 5% in the same period.

With labor deals in vogue in the airline space, high labor costs are not unique to American Airlines. Other players in the same space like Hawaiian Holdings (HA - Free Report) and Allegiant Travel Company (ALGT - Free Report) too have inked deals with various labor groups over the last few months.

American Airlines' high debt levels and July traffic report also raise concerns. Load factor (percentage of seats filled by passengers) also declined in the month as capacity expansion outweighed traffic growth.

Furthermore, weather-related factors have been hurting the carrier’s overall performance. Harvey impacted operations of the company leading to multiple flight cancellations. Irma is also expected to dent its operations severely.

American Airlines expects total revenue per available seat miles (TRASM: a key measure of unit revenue) to grow at a slower pace in the third quarter due to difficult year-over-year comparisons.

Price Performance

Due to the above-mentioned headwinds, shares of American Airlines have struggled so far this year. The stock has been down 6.6% year to date, as against the industry’s rally of 7.8% in the same period.

In view of the above commentary, we would advise investors to wait for a better entry point before accumulating shares. In fact, American Airlines’ Zacks Rank #3 (Hold) also seems to suggest the same.

Stock to Consider

Investors interested in the airline space may consider SkyWest Inc. (SKYW - Free Report) sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SkyWest witnessed the Zacks Consensus Estimate for current-year earnings being revised 1.9% upward over the last 60 days.

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