American Airlines Delivers Solid Q3 Earnings as Travel Demand Continues to Surge

We’ve increased our fair value estimate about 2.5% to $20 per share for no-moat-rated American Airlines (AAL) following the firm’s third-quarter earnings release. American delivered its second consecutive quarter of profitability, posting total revenue of $13.5 billion (13% higher than third-quarter 2019 levels) and adjusted operating margins of 7.2%. Despite grappling with nearly 10% lower capacity and 93% higher fuel costs compared with the third quarter of 2019, robust financial results were enabled by strength in underlying travel demand and favorable pricing during the quarter.

Demand for domestic and short-haul international flights continued to show promise during the third quarter. Domestic flight capacity was just 6% below 2019 levels, whereas short-haul international capacity far outpaced those seen in 2019. Long-haul international remained weaker, although management expressed optimism regarding demand growth and a reopening of international borders. Management also evidenced positive travel patterns among both leisure and business travel, with blended trips composing a larger share of total demand. Despite the impressive rebound in demand from the depths of pandemic lockdowns, headwinds remain prevalent due to persistent cost inflation, aircraft delivery delays, and regional pilot shortages, prompting a gradual capacity growth outlook.

While operating costs remain elevated due to inflationary pressures and labor shortages (cost per available seat mile was 25% higher than 2019), pent-up demand prompted customer willingness to absorb higher prices. American posted a double-digit increase in yield during the quarter compared with 2019 levels. We believe American’s strong results may continue in the fourth quarter given management’s favorable revenue outlook (11%-13% higher than 2019) and adjusted operating margin guide (5.5%-7.5%). We remain encouraged by the rebound in travel demand and American’s efforts to become more operationally efficient.