Is This Airline Stock A Better Pick Over American Airlines?

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shares of American Airlines (NASDAQ:AAL) Currently trades 35% below pre-covid levels as compared to a decline of 44% United Airlines Stock (NASDAQ:UAL). United Airlines posted an operating cash burn of $4.1 billion last year, down from an $11 billion drop in market capitalization since February 2020. Compared to a $7.2 billion decline in American Airlines’ market capitalization and an operating cash burn of $6.5 billion, Trefis believes United Airlines stock is a good value investment. Also, Phase III of the Payroll Support Program prohibits airline companies from returning capital to investors in the form of dividends and share repurchases until September 2022. We compare historical trends in both companies’ revenue, margin and valuation multiples in an interactive dashboard analysis. American Airlines vs United Airlines: industry peers; Which stock is the better bet?– Parts of which are highlighted below.

1. Revenue Growth

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United’s growth was slightly higher than that of the US before the pandemic, with United’s revenue grew from $36.6 billion in 2016 to $43.3 billion in 2019 at an average rate of 5.8% per year, versus US revenue Which grew by 4.5% year over year from $40 billion in 2016 to $45 billion in 2019. The travel and tourism industry was hit hard by the pandemic, with both companies reporting a 60% (year-on-year) top-line contraction in 2020.

  • To meet demand-supply and lower operating losses, United and American reduced capacity (seat miles available) in 2020 by 57% and 50%, respectively. Thus, low capacity and low cash generation from occupancy rates prompted the need for government support to support maintenance costs and staff salaries.
  • As per PSP-3 requirements, dividend payments and share buybacks remain suspended till September 2022 as the airline industry is facing hiccups from multiple waves of coronavirus infections.
  • United and American’s toplines have been driven primarily by domestic demand over the years. In 2019, the share of domestic businesses in United and American’s total revenue was 74% and 62%, respectively.
  • Both companies posted strong revenue growth this year, aided by a decline in domestic travel demand and new infections after the fourth wave (due to the delta version). ,related: Southwest Airlines stock poised for strong gains?,

2. Returns (Profits)

Speaking of returns, United is reporting a slightly higher operating margin than American.

  • In 2019, United Airlines reported $43 billion in revenue, $3 billion of net income — on a net margin of 7%. Similarly, American Airlines reported $46 billion in revenue, net income of $1.6 billion — on a net margin of 4%.
  • US’s largely lower net margin has been largely due to $1 billion of annual interest expense on $20 billion of long-term debt.
  • In addition, American’s highly leveraged balance sheet resulted in an operating cash burn of $6.5 billion, compared to $4.1 billion for United Airlines.

3. Risk

American Airlines seems risky for both companies from a financial leverage standpoint.

  • High static costs and very low demand over the past two years have taken a toll on all air carriers. With the culmination of the CARES Act grant, the airline industry faces downside risks from recurring travel restrictions due to multiple contagion waves. Thus, revenue contraction with a loaded balance sheet negatively affects shareholder returns.
  • As dividends and share repurchases remain suspended until September 2022, profiting from short-term declines remains a rational investment strategy for airline stocks.
  • United and American ended Q3 2021 with long-term debt (net of cash and cash equivalents) of $14 billion and $24 billion, respectively.
  • Given United Airlines’ strong balance sheet, we believe the stock is a better pick on American Airlines. ,related: American Airlines Stock To Tread Water?,

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