Key Takeaways

  • Analysts estimate adjusted EPS of -$2.06 vs. -$7.82 in Q2 FY 2020.
  • Passenger load factor is expected to rise YOY, but will still be below pre-pandemic levels.
  • Revenue is expected to rise sharply as passenger travel rebounds.

American Airlines Group Inc. (AAL) saw customer demand plunge throughout the COVID-19 pandemic, as travelers chose to stay home due to health concerns and regulations. The airline ended Q1 2021 with $48 billion in debt and lease liabilities, the largest in the industry. While American Airlines' business volume in Q2 improved at a faster rate than previously anticipated, the company still has significant ground to make up.

Investors will closely watch the pace of American Airlines' recovery when the company reports Q2 FY 2021 earnings before the market open on July 22. The news may be very mixed. Analysts estimate that American Airlines will post its sixth straight quarterly adjusted loss per share (EPS), though it will narrow dramatically year-over-year (YOY). Revenue is expected to improve significantly, but not to pre-pandemic levels.

A key metric that investors are likely to focus on is American Airlines' passenger load factor, a measure of airline efficiency that reflects the percentage of American Airlines' seating capacity that is being used. Analysts predict that load factor will improve to its highest level since Q4 FY 2019. A big risk facing American Airlines and other carriers may be the fast-spreading Delta variant, the most contagious version of the COVID-19 virus. If it continues to spread, it could dampen some consumers' enthusiasm for air travel.

Despite wild swings, shares of American Airlines have risen at more than twice the pace of the broader market in the past year. The stock led the market in August of last year and then traded horizontally through October before briefly underperforming. Then, the stock raced ahead beginning in mid-November, and has outperformed over the last eight months through July. While the shares have outperformed, they reached high points in both mid-March and early June, and then pulled back. The stock, for instance, fell ahead of the Q1 2021 earnings report and then rallied to the June high. As of July 20, the company has provided a 1-year trailing total return of 79.3%, well ahead of the S&P 500's total return of 32.9%.

One Year Total Return for S&P 500 and American Airlines
Source: TradingView.

American Airlines Earning History

Investor optimism about the emerging economic recovery has lifted American Airlines' stock in recent months. Earnings improvements in the last half of FY 2020 may have also contributed. The company has posted five consecutive quarters of adjusted losses per share, beginning in Q1 FY 2020. However, losses narrowed significantly in Q3 and Q4 FY 2020. This trend reversed in Q1 FY 2021, as adjusted losses per share widened on both a YOY and sequential basis. Now, analysts expect improvement once again for Q2 FY 2021, with American Airlines posting its narrowest adjusted loss per share since the start of the pandemic. Nonetheless, this would be a far cry from the profitability of FY 2019.

American Airlines' revenue may show an even stronger recovery in Q2 FY 2021. The company posted five consecutive quarters of YOY revenue declines through Q1 FY 2021, the first declines in several years. The most significant YOY drop took place in Q2 FY 2020, when revenue plunged 86.4%. The subsequent three quarters saw progressively smaller YOY declines. Analysts now predict a significant improvement for Q2 FY 2021, as revenue more than quadruples YOY from its nadir in Q2 FY 2020. Still, estimated Q2 FY 2021 revenue would be down nearly 40% compared to Q2 FY 2019, before the onset of the pandemic.

American Airlines Key Stats
Estimate for Q2 FY 2021 Q2 FY 2020 Q2 FY 2019
Adjusted Earnings Per Share -$2.06 -$7.82 $1.82
Revenue (billions) $7.3 $1.6 $12.0
Load factor 74.4% 42.3% 86.6%

The Key Metric

As mentioned, American Airlines investors are likely to look to the company's load factor as well. This key metric for the airline industry is a measure of the percentage of available seating capacity that is filled with passengers. Higher load factors indicate a higher percentage of seats that are occupied by passengers. Airlines experience roughly fixed costs to send an aircraft into flight regardless of the number of passengers on board, so there is an incentive to fill as many seats as possible in order to better distribute those costs. For this reason, a higher load factor is a sign of greater efficiency and profitability. In the past year, however, there have been strong pressures against load factor, primarily because the COVID-19 pandemic has turned the above logic on its head. Fuller planes are seen as worse from a public health perspective during a pandemic. As fewer passengers travel and load factor drops, companies like American Airlines face a profitability crisis.

American Airlines' load factor fell dramatically during the pandemic. Throughout FY 2018 and FY 2019, the company's quarterly load factor hovered between 80% and 86%. It dipped to 72.7% in Q1 FY 2020, reflecting the impact of the start of the pandemic on the latter portion of the quarter. Load factor then plunged to 42.3% for Q2 before gradually recovering in Q3 and Q4 FY 2020. The load factor reversed course in Q1 FY 2021, falling to 59.5%. That was both a sequential decline from Q4 and also a YOY drop from Q1 FY 2020. Consensus estimates predict that load factor will improve to 74.4% for Q2 FY 2021. While that would be higher than the past five quarters, this figure is still well below American Airlines' pre-pandemic load factor levels.