American Airlines will report its Q3 earnings results before the market open on Thursday. Although there is a restrained optimism for the firm’s figures, the decline in passenger demand due to the long-lasting Covid-19 disruptions and the Delta variant outbreak during the summer seems to be preventing the complete recovery of the airline sector. The uncertain outlook for the company’s prospects is reflected by the fact that out of the 21 Refinitiv analysts, there are just five ‘buy’ recommendations, while eight recommend ‘hold’ and eight ‘sell’.

Delta variant clouds airlines’ outlook

Airlines have been hit hard over the past two years, with global lockdowns serving to ground their fleets for the first time in the history of the sector. Earlier this year, the global vaccination rollout programs enabled a slow but steady recovery in flight capacity, but the Delta variant outbreak in the summer dented a significant amount of the progress. Currently, domestic leisure travel continues to lead the recovery, with business travel bouncing back at a much slower rate, while international travel remains subdued due to ongoing global travel restrictions. The US government’s plan to allow international travel for all vaccinated passengers from November 8 underpins the industry’s growth prospects. However, even though flight capacity and demand are anticipated to continuously increase, forecasts suggest that a return to pre-pandemic levels of activity is not expected until 2023.

 

Increasing fuel prices undermine the sector’s recovery

Following the surge in oil prices, airlines are facing increased fuel costs, which threaten their ability to generate a profit in the current economic climate. Airlines would typically try to pass rising costs onto passengers by raising ticket prices, but the industry is still operating in a highly uncertain environment, making it impossible to pass on costs and stimulate the market simultaneously. To make matters worse, many airlines gave up on hedging their future fuel requirements when chaos ripped through the oil market last year, leaving them substantially exposed to the sharp rise in oil prices.

Weak revenue growth, insufficient to avert losses

Although American Airlines’ financial results appear promising, they still reflect the weakness of the company to reach its pre-pandemic figures and achieve a full recovery. The company is projected to post revenue of $8.95 billion for Q3, according to consensus estimates by Refinitiv IBES, which would constitute a year-on-year growth of 182%. Earnings per share (EPS) are estimated to remain negative, at a loss of $1.04 in Q3, despite representing an increase of 81.25% on annual basis. Moreover, net income is forecast to be in the red for the seventh consecutive quarter. Specifically, it is anticipated at $-612.85 million in Q3, a 78.25% improvement over Q3 2020’s figure.

Share price under pressure

Taking a technical look at American Airlines, a neutral outlook can be observed as the share price has been moving in a sideways pattern since early June. However, the short-term picture seems bearish, with the price dropping under its 50- and 200-day simple moving averages (SMAs). If earnings disappoint, initial support may be found near the double-bottom region of $18.3, a downside break of which would turn the focus towards the $16.5 hurdle. On the other hand, stronger-than-expected results could propel the stock above its SMAs and perhaps aim for the $22.2 resistance barrier. If buyers manage to conquer this barricade, then the next challenge could be met at $26.

Focus on the competition

Even though the airline sector as a whole has realized huge losses after the Covid-19 pandemic outbreak and its recovery prospects are far from encouraging, it is important to outline American Airlines’ financial performance relative to its peers. The company holds the best trailing 12-month price to earnings (P/E) ratio of -1.87 (as of October 20, 2021) in the industry. Nevertheless, its forward 12-month P/E ratio is currently projected at -19.5, while most of its major competitors are anticipated to post a positive figure. This comparative valuation suggests that the future growth prospects of American Airlines are significantly lower than its competition.

Overall, analysts are holding on to their bearish views of American Airlines stock, despite the expected increase in its revenue. The ongoing energy crisis as well as the long-lasting Covid-19 repercussions pose a considerable threat to the company’s full recovery.