American Airlines’ stock loses another bull due to ‘missteps’ by managementAirline’s move away from GDS booking norm could cost money to mend ‘bruised’ relationshipsAnother Wall Street analyst backed away from their bullish call on American Airlines Group Inc.’s stock, citing the fallout from management’s missteps regarding a plan to boost direct sales.
Bernstein analyst David Vernon said the airline’s deal with its flight attendants’ union could also raise costs and slow the pace of earnings growth. That in turn could highlight the carrier’s relatively high debt burden.The stock AAL fell as much as 2.2% intraday before bouncing to be up 0.1% in morning trading. The stock had closed Friday at $10.58, the lowest price since May 29, 2020, when the COVID-19 pandemic put the brakes on travel.
Vernon cut his rating on American’s stock to market perform after being at outperform since March 2022. He lowered his stock-price target by 33%, to $12 from $18.
He said that American’s attempt at a “modern retailing” system, in which the carrier looked to boost direct sales and reduce reliance on the Global Distribution System used by peers and travel agents, basically backfired.Rather than boosting sales, Vernon said all the move did was result in American “cutting sales staff and pushing frustrated travel agents [and] corporate clients into the arms of competitors.”
He noted that while American said in April that its managed corporate travel business saw year-over-year sales growth in the mid- to high-single-digit percentage range in the first quarter, legacy carrier rivals United Airlines Holdings Inc. UAL and Delta Air Lines Inc. DALboth saw growth of 14%.
“Hiring back sales staff can be handled quickly, but mending bruised customer relationships will be a challenge that could even take money to fix,” Vernon wrote in a note to clients.
Another worry is the tentative agreement reached on Friday between American and the Association of Professional Flight Attendants.While details of the agreement won’t be released until after the APFA board and executives meet on Wednesday, Vernon worries that the increase to labor costs could make future earnings growth look slower.
And pressure on earnings could very well reignite concerns over American’s debt load.
He noted that American has more debt that its rivals, mostly because it has a “younger, more simplified fleet” compared with Delta and United.There will be interest in whether American details the impact the recent CrowdStrike outage had on its performance and its potential effect on future results.
Meanwhile, Wall Street’s view of American’s stock has already been souring in recent months, following the company’s profit warning in late May.
Eight of 24 analysts surveyed by FactSet who cover American’s stock are now bullish, down from 12 as of the end of April. The average analyst stock-price target has dropped to $14.11 from $17.98 over the same time frame.In comparison, 20 of 22 analysts who cover Delta are bullish, the same number as at the end of April, while the number of analysts who are bullish on United has increased to 20 from 17.
In addition, American’s credit is rated B+ at S&P Global Ratings, which is one notch lower than United’s credit rating of BB- and three notches below Delta’s rating of BB+. American’s credit is four notches deep into speculative-grade, or “junk,” territory.We assume lower-than-expected operating results in 2024 will limit improvement in [American’s] credit measures, which we view as weak for its rating,” S&P said in its rating review, which followed American’s profit warning.
American’s stock has dropped 22.9% year to date, while Delta shares have rallied 17.2% and United’s stock has gained 11.2%. In comparison, the U.S. Global Jets exchange-traded fund JETS has edged up 0.1% this year and the S&P 500 SPX has advanced 16.3%.