For much of last year, American Airlines (AAL 3.04%) shares seemed to defy gravity, despite the continuing impact of the COVID-19 pandemic on demand.

Indeed, American posted a pre-tax loss of $2.5 billion in 2021. Excluding special items (most notably, the benefit from government payroll support programs), its pre-tax loss came to nearly $7 billion. Nevertheless, American Airlines stock spent much of last year above $20, putting its market cap roughly in line with pre-pandemic levels and its enterprise value at a multiyear high.

AAL Market Cap Chart

American Airlines Market Cap and Enterprise Value, data by YCharts.

Recently, reality has started to sink in. American Airlines stock has lost more than a quarter of its value since April. Yet the company faces severe profit headwinds that could keep the stock moving lower over time.

High costs offset strong demand

Last month, American Airlines raised its guidance for the second quarter. It now expects to report a 4% to 6% adjusted pre-tax margin: up from an initial forecast of 3% to 5%. That would give the company its first quarterly profit since 2019.

This represents a step in the right direction. However, American needed a huge improvement in demand just to eke out this small guidance increase. American Airlines currently estimates that unit revenue surged 20% to 22% compared to Q2 2019 last quarter: 6 percentage points better than its initial outlook. And even with sales booming, American's updated guidance calls for a quarterly adjusted pre-tax margin well below its Q2 2019 result of 9%.

Moreover, American Airlines lost $1.9 billion before tax in the first quarter, excluding special items. The company's projected profit for the second quarter -- typically the most profitable part of the year -- won't even offset half of its Q1 loss. That leaves American on track for another full-year loss in 2022.

An American Airlines plane in flight, with mountains in the background.

Image source: American Airlines.

More cost increases ahead

Recently, fuel costs have been the biggest pressure point on American Airlines' bottom line. But non-fuel unit costs remain well above 2019 levels, too.

Soaring pilot pay could add to American's earnings woes in the near term. Last month, the company handed out huge pay raises to the thousands of pilots at its wholly owned regional airlines. In addition to permanent raises, the pilots will receive a 50% pay bump through August 2024 as American Airlines looks to address the attrition problem that is roiling the regional airline industry.

American Airlines also recently extended a new contract offer to its mainline pilots. If ratified, the pilots would receive average raises of 6% on the date of signing, additional 5% raises at the beginning of 2023 and 2024, and a one-time retroactive pay bonus.

These pay increases may be necessary to retain and recruit pilots, but they will likely boost annual expenses by $500 million or more over the next few years. That will make it harder for American Airlines to restore its earnings to pre-pandemic levels.

American Airlines stock looks like a value trap

Following its recent slide, American Airlines stock trades for just seven times its projected 2023 earnings and less than four times its projected 2024 earnings. This might make it seem like a terrific bargain.

In reality, American Airlines stock is more likely to be a value trap. Perhaps demand will remain red-hot, enabling the company to recoup rising costs. But there are already signs that inflation is starting to pinch leisure travel budgets. Meanwhile, if the U.S. economy slips into recession, that will undoubtedly lead companies to rein in spending on business travel.

If demand falls short of expectations, American Airlines could struggle to return to consistent profitability over the next couple of years. Unfortunately, American has much less room for error than most of its peers, due to its colossal debt load. The company has $4.2 billion of debt maturing in 2023, $3.5 billion maturing in 2024, and a staggering $9.3 billion maturing in 2025.

For now, American Airlines has plenty of cash to cover near-term debt maturities. But if the company's earnings power doesn't recover soon, the airline giant could find itself in distress a couple of years down the road. As a result, American Airlines stock may look cheap now, but it could keep getting cheaper.