What happened
American Airlines Group (AAL 0.25%) said Monday it intends to restore most of its fleet to active status in anticipation of a summer surge in demand. On Tuesday, the stock was surging as a result, up more than 5% in afternoon trading.
So what
American and other airlines endured a miserable 2020, with travel demand all but wiped out by the pandemic. But as the vaccine rollout continues, investors are growing more optimistic we'll see a flood of leisure travel this summer, and American's commentary served to confirm those expectations.
Image source: American Airlines.
The airline said in a regulatory filing that as COVID-19 trends have improved, "the company has experienced recent strength in domestic and short-haul international bookings." As of March 26, American said its seven-day moving average of net bookings is about 90% of the level experienced in 2019.
Wall Street is taking notice. Jefferies analyst Sheila Kahyaoglu upgraded American to a hold from an underperform and raised her price target to $25 from $15, saying that American is the sole operator on about 37% of its routes. That, Kahyaoglu says, should give the airline "considerable potential" to retain pricing power and outperform its rivals through the recovery.
Now what
Not everyone is convinced. Citi analyst Stephen Trent said in a note that he is taking a "cautious view" on American's announcement given that government payroll assistance has made it relatively pain-free for airlines to add capacity. With that in mind, he said that commentary about reactivating aircraft "paints an incomplete picture" about airline economics. Trent has a sell rating on American shares.
Even if the news is all good, it is worth noting that the recovery is arguably priced into the shares already. By some measures, airlines are worth more now than they were prior to the pandemic. Given the uncertainty about how the pandemic will play out, and the fact that airlines like American are not expecting business and international travel to recover fully for years, there is reason for investors to be cautious right now.
