American Airlines is a Value Trap That You Should Avoid
With the demand for air travel booming, airline stocks performed pretty nicely in 2015. Most of the stocks in the industry moved higher and due to tailwinds like cheaper oil and further increase in demand, 2016 is expected to be a good year for the stocks as well.
Unlike other carriers, American Airlines (AAL) has disappointed this year. Despite the carrier’s undervaluation and no-hedge policy, American Airlines’ shares have been range bound over the last few months. The company is trading at a very cheap valuation, and with oil prices falling consistently, American Airlines’ earnings are expected to climb significantly in the coming months.
Despite the presence of so many tailwinds, investors have not bid up the stock.
Competition on price will end baldy
American Airlines has been competing against low-cost carriers aggressively on price and this has resulted in a decline in unit revenue for the carrier. According to the Wall Street Journal, American Airlines, along with other major carriers, competed aggressively against low-cost carriers in the month of December.
American Airlines has been competing very aggressively on price despite its higher unit cost and I think this move will come back to haunt the company in the long run. Not only does the price war lower its unit revenue, it also spooks investors away from the stock. Many carriers have gone bankrupt in the past due to aggressive price war and with American Airlines repeating the same mistake, the stock will likely head lower irrespective of crude oil prices.
Hence, the cheap valuation of American Airlines is a delusion and I believe the stock still has more room to fall despite its earnings growing tremendously. Investors should sell American Airlines in favor of other airline stocks like Virgin America (VA) and Alaska Airlines (ALK) to make the most of the boom in air travel.
Due to the reasons mentioned above, I strongly believe that American Airlines is a value trap and investors should sell the stock. Despite its cheap valuation, the company is shooting itself in the foot by competing against low-cost carriers on price. This strategy will put downward pressure on American Airlines’ stock, whereas other carriers will blossom. So, I think investors should sell American Airlines.