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Why Shares of American Airlines Are Soaring Today

By Lou Whiteman - Updated Jan 28, 2021 at 10:37AM

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Earnings came in better than expected. But they weren't THAT good.

What happened

Shares of American Airlines Group (AAL 7.09%) jumped as much as 30% higher on Thursday morning following the airline's fourth-quarter earnings announcement. The results came in a bit better than expectations, but weren't good enough to justify the response.

So what

Before markets opened, American said it lost $3.86 per share in the fourth quarter on revenue of $4 billion, besting analyst expectations for a $4.11-per-share loss on revenue of $3.88 billion. Revenue during the quarter was down 64% from a year prior, with the airline burning through about $30 million per day during the period.

An American Airlines plane on the tarmac.

Image source: American Airlines.

American and other airlines have been hit hard by the COVID-19 pandemic, which reduced demand for travel. The industry has raised billions in order to survive the crisis, but is facing a prolonged recovery.

In a statement, CEO Doug Parker called 2020 "the most challenging year in our company's history," and admitted the timing of a recovery is uncertain.

"As we look to the year ahead, 2021 will be a year of recovery," Parker said. "While we don't know exactly when passenger demand will return, as vaccine distribution takes hold and travel restrictions are lifted, we will be ready."

American expects first-quarter 2021 revenue to be down 60% to 65% from a year prior. The airline expects to end the quarter with about $15 billion in total available liquidity, enough to continue to manage through this difficult period.

Now what

There is nothing about American's results that stood out from other airlines that have reported, yet the stock's reaction is disproportionate to the movement of the rest of the industry.

As I wrote yesterday, it seems likely some of this movement is connected to the Reddit community WallStreetBets, which has targeted stocks with a significant number of shares sold short. American has the largest short interest of any major airline, and it is likely many of those shorts are covering their positions and bidding the stock price up out of fear of being caught in a short squeeze.

Regardless of the reason, it is too much too soon for an airline that, although positioned to survive, is not likely to be one of the first to recover. If I were running American, I'd be looking at the stock reaction and considering a secondary offering to raise cash and begin paying down some of the billions in debt added due to the pandemic. That's of course assuming the jump holds, which given the stock's movement on Thursday is no guarantee. 

For individual investors, the best advice is to watch this drama play out from the sidelines.

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