Earlier this month, American Airlines (AAL 2.98%) raised its fourth-quarter guidance. On Thursday, the airline giant posted results roughly in line with its updated forecast and slightly ahead of analysts' estimates.
However, American Airlines continues to report extremely poor results by objective standards. That trend is set to continue into 2022. Moreover, the company is still struggling under a massive debt burden, giving investors plenty of reasons to avoid American Airlines stock.
Another big quarterly loss
American Airlines recorded $9.43 billion of revenue last quarter, up from $4.03 billion a year earlier but down 17% compared with the fourth quarter of 2019 on 13% less capacity.
While unit revenue decreased a modest 4.2% relative to Q4 2019, American faced significant cost pressures. First, adjusted non-fuel unit costs surged 13.4% over that period, because of lower capacity, an incentive program to boost reliability, and other recovery-related expenses. Second, fuel costs have jumped due to the recent spike in oil prices. Third, American Airlines' interest expense has increased because of all of the incremental debt it took on to survive the past two years.
Image source: American Airlines.
This caused American Airlines to report a $1.18 billion pre-tax loss for the quarter, putting its adjusted pre-tax margin at minus-12.5%. That translated to an adjusted loss per share of $1.42.
These results were not as bad as what management had expected a few months ago. The full-service airline's initial guidance for the quarter called for a 20% revenue decline relative to Q4 2019 and an adjusted pre-tax margin between minus-16% and minus-18%. Still, by any objective standard, American's results were terrible -- and worse than what analysts had anticipated prior to the company providing its fourth-quarter outlook.
The first quarter will be even worse
Between seasonal weakness and the omicron variant's impact on demand, American Airlines is set to ring up another big loss in the first quarter. The company expects revenue to decline 20% to 22% compared with the first quarter of 2019 on 8% to 10% less capacity. Meanwhile, total costs will be up slightly from three years ago, with higher nonfuel unit costs, increased interest expense, and higher fuel prices more than offsetting reduced capacity and improved fuel efficiency.
If this outlook proves accurate, it implies a first-quarter adjusted pre-tax loss of more than $2 billion. Even if American ultimately beats its guidance, as it did last quarter, it nevertheless seems clear that the company is going to lose a lot of money this quarter -- and more than Wall Street analysts had been expecting.
Image source: American Airlines.
To be fair, American Airlines does expect to return to profitability later this year, as demand continues to recover. However, the company is digging itself such a deep hole in the first quarter that it will be hard to earn a full-year profit or generate positive free cash flow in 2022.
No reason to own American Airlines stock
American Airlines stock retreated on Thursday, after the company's earnings release. It ended the day at $16.76, within striking distance of its 52-week low. That might make the stock seem like a bargain, given that several analysts expect earnings per share to rebound to between $4 and $6 on roughly $50 billion of revenue by 2024.
Nevertheless, savvy investors will resist the temptation to buy this long-suffering airline stock. American Airlines has missed analysts' estimates repeatedly in recent years. Moreover, airline industry competition will be tougher than ever over the next few years. Budget carriers have continued growing their fleets through the pandemic, and American's fellow network airlines will be looking to make market share gains among high-fare business travelers.
That could keep a lid on profits for the foreseeable future. And given that American Airlines ended 2021 with over $46 billion of debt and lease liabilities, it would take many years of strong profits and cash flow to fix its balance sheet. As long as American's massive debt load continues to hang over the company, investors can probably find better places to put their money.
