A day after American Airlines Group (AAL 2.54%) reported a smaller-than-expected first-quarter loss, Wall Street is climbing on board. A slew of upgrades and price target boosts had the stock up by as much as 5% in Friday morning trading.
The airline industry has been slow to recover from the impact of the pandemic, and American has long been viewed as a more vulnerable operation than most of its peers. When COVID-19 first hit, it was not as far along in its turnaround as some rivals, and had a higher debt total than most of them. But the airlines have navigated the crisis more effectively than many expected them to back when demand for passenger flights was practically nonexistent, and now, with travel on the rebound, American looks poised to go along for the ride.
On Thursday, American reported a lower-than-expected Q1 loss and provided a positive outlook for the year. Management said that strong summer travel demand coupled with still-limited capacity was giving it enough pricing power to offset higher fuel costs.
Analysts liked what they heard. On Friday morning, JP Morgan upgraded American to neutral from underweight, and Argus boosted it to buy from hold. Barclays raised its price target on the stock from $15 to $20, but kept an underweight rating on the shares, and Deutsche Bank kept its buy rating in place and raised its price target from $23 to $25.
Investors appear to be taking these analysts' views to heart on Friday morning. The stock lost some of its earlier momentum along with the broader markets on headlines suggesting that the Federal Reserve was planning to take more aggressive actions to curb inflation, but as of 11:30 a.m. ET, American shares remained in the green even as the S&P 500 was off by more than 1%.
Wall Street tends to get nervous when the Fed gets aggressive, but airline investors have every reason to hope the central bank will be able to tame inflation. With fuel costs soaring and the labor market tight, airlines will need to retain their pricing power if they are going to meet their rosy full-year guidance numbers. An economic environment in which consumers keep feeling pinched on the basics -- and potentially start rethinking their vacation plans -- would not be ideal for the travel industry.
The airlines are well on their way to a recovery, but getting back to health will take time. They're still waiting for a rebound in business and international flying -- two categories that tend to be more lucrative for the carriers -- and the fledgling recovery in domestic tourist travel remains vulnerable not just to inflation but also to new twists in the pandemic.
There is likely a ceiling on how high airline stocks like American can fly in the near term. Those buying in now in the hopes of seeing them make a quick recovery should buckle up -- there's likely to be further turbulence ahead.