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American Airlines Near Its Five-Year Low: Why the Drag?

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Aug. 23 2019, Published 4:46 p.m. ET

American Airlines (AAL) stock is going through turbulent times. The stock has lost nearly 17.4% of its market value year-to-date and has underperformed the broader market. The Dow Jones, the S&P 500, and the Nasdaq indexes are up 12.5%, 16.6%, and 20.4%, respectively, year-to-date.

At yesterday’s closing price of $26.53, American Airlines stock is currently trading near its five-year low of $24.85 reached on June 27, 2016. The stock is down 55% from its five-year high of $59.08 attained on January 16, 2018. AAL is down nearly 40% from its 52-week high of $43.89 reached on September 21, 2018.

In this article, we’ll look at the factors responsible for the underperformance of American Airlines stock.

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Comparing American Airlines stock with its peers and the industry

In comparison with the industry, American Airlines stock has underperformed the iShares Transportation Average ETF (IYT), which invests in Dow Jones US transportation stocks. IYT allocates approximately 18.2% of its fund in the passenger airline industry, and the ETF is up 10% YTD.

AAL stock’s performance lags its major peers. Year-to-date, shares of Southwest Airlines (LUV) and United Airlines (UAL) have gained 10.1% and 2.2%, respectively. Delta Air Lines (DAL) stock has emerged as the top performer among major US air carriers, returning 16.2% this year so far. Delta Air Lines does not have any 737 MAX aircraft in its fleet.

Macro factors affecting American stock

Global slowdown concerns and uncertainty over the US-China trade negotiations kept investors cautious about the airline industry’s near-term growth prospects. Although these macroeconomic factors don’t have a direct impact on the industry, the industry reflects these factors’ effects in the long run.

Increasingly tense trade relations could negatively impact airlines’ business traveler traffic in the long run. Sluggish economic growth generally affects the job market adversely, leading people to postpone or cancel their vacation plans.

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Further, business disruptions at the start of the year also compelled investors to remain cautious about the airline industry. Notably, the partial government shutdown and severe winter weather at the start of 2019 hampered the operations of several airlines. In an April 9 SEC filing, American Airlines revealed that it canceled more than 1,000 flights in the first quarter due to the partial government shutdown.

One of AAL’s major competitors, Southwest Airlines, also faced massive business disruptions in early 2019. The company canceled 3,800 flights in the first quarter due to unfavorable weather conditions. Additionally, Southwest delayed its Hawaiian Islands expansion plan due to the government shutdown in January.

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MAX crisis hurt American Airlines’ financials

Apart from external factors, American Airlines is grappling with several internal issues that are hampering its operations. The company is losing money daily due to the worldwide grounding of its fleet of Boeing (BA) 737 MAX planes—its most economical aircraft. Notably, Boeing’s MAX aircraft fleet has been banned globally since mid-March following two fatal crashes within five months.

American Airlines currently owns 24 MAX jets and has placed orders for 76 more MAX aircraft. Due to its grounding, the airline recorded 940 flight cancellations in the first quarter and 7,800 in the second quarter.

Further, the MAX grounding reduced the company’s overall capacity during the second quarter, putting pressure on its unit revenue costs. American Airlines revealed that the MAX fiasco cost approximately $175 million in the previous quarter. The company estimates that the MAX grounding could negatively hurt its 2019 pretax income by $400 million.

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The 737 MAX’s return to service

The uncertainty over the MAX’s return to service still casts a long shadow. Boeing expects to fix the issue by the end of September and receive regulatory safety approval in early October. However, the immense scrutiny required by the FAA to return the aircraft to service makes us doubtful about the timeline of this approval process.

According to a Reuters report, the Federal Aviation Administration has asked several airlines to send pilots to participate in the simulator test for the MAX aircraft. These pilots must have flying experience in the 737 MAX.

The longer the MAX grounding continues, American Airlines should continue to lose money in terms of lost revenue and operating profit. The company would also have to halt its capacity expansion plans.

Southwest Airlines and United Airlines are also feeling the pinch of the MAX grounding. Southwest, which owns 34 MAX aircraft, has recorded over 20,000 flight cancellations since the 737 MAX ban began. United Airlines, which has 14 MAX aircraft, posted 3,440 flight cancellations in the second quarter.

Labor contract issue

American Airlines is also facing business disruptions due to the ongoing labor contract issue with its mechanics. The conflict between the two parties has reached a point where it is affecting the airline’s regular business operations.

In May, American Airlines had blamed mechanics for allegedly slowing down repairs to obtain the upper hand in contract negotiations. The work slowdown is causing significant flight cancellations for the company. Last week, the airline disclosed that it has canceled over 900 flights in the previous two months due to the alleged work slowdown, according to a CNBC report.

During its second-quarter earnings results, American Airlines noted that the MAX grounding and its dispute with mechanics drove its second-quarter non-fuel cost by 5%.

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