American Airlines Is a Terrible InvestmentAAL) for quite some time now. The primary reason for my bearish stance on American Airlines has been the company’s debt burden and the fact that it was trying to undercut ULCC peers likes Spirit Airlines (SAVE) on ticket prices.
Shares of American Airlines have fallen over 10% in the reference period, while the likes of Spirit Airlines have thrived. Obviously, given the sturdy business structure of Spirit Airlines, American Airlines attempts to compete on fares were always going to end in a disaster.
With air fares rising for the last few months, I still think American Airlines is not a good investment and investors should still consider sticking by carriers like Spirit Airlines and JetBlue (JBLU).
After 18 months of consistent decline, it looks like crude oil has finally bottomed.
Moreover, with crude oil moving higher, American Airlines will find it impossible to compete against Spirit. Spirit has the lowest unit cost among carriers in the U.S. and has a better balance sheet than American Airlines. Although American Airlines was able to compete against Spirit on ticket fares when oil was near $30 per barrel, it will be impossible for it to continue down that road if oil prices move to north of $40 per barrel.
All in all, it means that American Airlines has wasted a lot of its fuel cost saving in competing against Spirit on price. The money could have been put to better use by paying off its large debt. Since American Airlines’ debt is still very high, I think investors should still stay away from the stock and should consider betting on other airlines.
After the recent pullback, American Airlines is trading at 3.8 times trailing earnings. While the stock’s valuation appears ridiculously cheap, I think it doesn’t have much upside potential and investors looking to benefit from the aviation industry should rather place their bets on the likes of Spirit and JetBlue. With oil price increasing, American Airlines will no longer be able to compete against Spirit, which is why I think the latter is a lot better investment opportunity.
Published on Mar 7, 2016By Akshansh Gandhi