Reports Q4 2021 results on Thursday 20 January, before the market opens
Income forecast: $9.31 billion
EPS Expectation: -$1.54
Airline shares remain a risky gamble despite the strong recovery in passenger traffic last year. The rapid spread of the Omicron variant and rising fuel prices have clouded the sector's growth prospects just as it began to recover from one of the steepest travel declines in recent history.
AAL Weekly TTM
American Airlines (NASDAQ:), the most beleaguered among US carriers, is likely to reflect these challenges in fourth-quarter earnings tomorrow. According to analyst consensus estimates, while revenue is expected to double compared to the fourth quarter of 2020, the company will post a loss that has increased over the period.
In October, the company warned that higher fuel costs could slow losses caused by the pandemic.
Fuel costs compete with labor as the top cost driver for carriers, and continued higher prices could help derail most U.S. airlines' efforts to return to profit following the collapse of travel during the coronavirus pandemic. American Airlines spent $1.95 billion on fuel and taxes in the third quarter alone, three times as much as a year earlier.
Along with rising costs, the explosive growth of Omicron infections in the US has added a new layer of uncertainty. The illness and bad weather were responsible for about 20,000 flight cancellations during the busy holiday season. Last week, Delta Air Lines (NYSE:) told investors that its rapidly spreading Omicron variant would delay a travel recovery by at least 60 days and contribute to a loss in the first quarter. As the number of coronavirus cases in the US is expected to peak in the next seven days, the pace of improvement in travel in the second half of February should resume the original trajectory of December, said Delta in his
Due to these risks, airline stocks have been under constant pressure since last summer. AAL shares are down about 29% since the June high. It closed at $17.90 on Tuesday after falling more than 3%.
Despite the pandemic uncertainty and cost pressures, the trend in air traffic in this Omicron environment shows that travelers are now much more willing to fly than last year. According to Transportation Safety Administration data, recent airport traffic is at about 85% of the pre-COVID peaks seen in late 2019 — not as good as the nearly 90% seen over the Thanksgiving weekend. was posted, but better than some investors had feared.
However, these encouraging air traffic trends do not hide the fact that airlines have been a poor investment for investors for years. The US Global Jets ETF (NYSE:) has fallen 23.5% in the past five years, a period in which its price more than doubled.
And even if domestic traffic picks up next year, the business segment — the most profitable for airlines — is unlikely to return to pre-Covid levels any time soon. The next phase of growth for airlines, which will depend on the resumption of international and corporate travel, still faces several uncertainties as new COVID variants emerge and all types of businesses seek to cut costs.
Bottom Line
Airline shares are not a convincing investment. The sector faces several challenges, including higher fuel costs, labor shortages and the possible emergence of new coronavirus variants. Amid these headwinds, it makes no sense to own airline stock when there are other potential opportunities in the market.
