What happened
Shares of American Airlines Group (AAL -2.18%) climbed nearly 5% higher on Friday after a Wall Street analyst took the stock out of the penalty box. The last 12 months have been tough for American and other airlines, but it appears the company is finally on the mend.
So what
American and other airlines have struggled to fly through the pandemic, with the entire industry sliding into the red in 2020 due to a lack of travel demand. But as vaccine counts rise, there is optimism that travelers are returning, and investors since last fall have been warming to the sector.
Image source: American Airlines.
American earlier in the week reported a first-quarter loss but said it is implementing an aggressive recovery plan to tap into expected demand. Equally important is the airline's claim that after loading up its balance sheet with significant debt in 2020 to survive the crisis, it has no further plans to raise liquidity and intends to use future cash flow to reduce its debt total.
Raymond James analyst Savanthi Syth on Friday upgraded the stock to market perform from underperform. Syth said in a research report that the recent sell-off in the shares provides a more balanced risk/reward profile. The analyst added that she is encouraged by American's efforts to improve profitability.
According to Syth, a domestic recovery, coupled with continued government funds and potential pension relief, has lowered the risks confronting American since she downgraded the stock back in November.
Now what
American is recovering, and I tend to agree with Syth that the downside from here is limited. A year ago, serious questions were being asked about the airline's ability to survive the crisis. Now, the most pressing issue is how quickly it will be able to recover.
Still, that's a tough question to answer. American appears ready to aggressively chase any and all passengers looking to fly this summer, running the risk of prioritizing revenue over profitability. Unfortunately, a lot of those efforts to improve profitability Syth mentioned are still in their early stages, and there are other airlines, including Spirit Airlines, that are better positioned to win fare wars.
American is a survivor, but it might be a while before the airline is an outperformer. I'd advise caution on the shares until the airline gets closer to hitting its profitability goals.
