After a tumultuous 24 months due to the coronavirus, the world is slowly limping back to normalcy. The pandemic decimated various companies, sectors, and economies, as borders were shut and lockdowns were imposed all over the world. The airline industry was among the worst-performing ones in the last two years, as travel came to a standstill.
Running an airline is a capital-intensive business which means companies have to raise debt to fund expansion plans. However, it is extremely difficult to make interest payments when revenue decelerates to a trickle. So, to keep operations running, airline companies may either restructure debt or raise equity capital, which burdens its financials or dilutes shareholder wealth.
Today I’ll analyze and compare American Airlines (AAL) and JetBlue Airways (JBLU) to determine which airline stock is currently a better investment.
American Airlines
In Q4 of 2021, American Airlines reported revenue of $9.43 billion, compared to $4.03 billion in the year-ago period. However, it was still down 17% compared to the same period in 2019. While capacity declined by 13% in Q4, its unit revenue was down 4.2% due to cost pressures such as high fuel prices and rising interest expenses.
American Airlines reported a pre-tax loss of $1.18 billion while its adjusted loss per share stood at $1.42 in Q4 of 2021. The company is expected to lose money in Q1 of 2022 as well, due to seasonal weakness coupled with the impact of Omicron.
American Airlines has forecast its top-line to decline between 20% and 22% compared to Q1 of 2019 which might result in a pre-tax loss of over $2 billion.
JetBlue
In October 2021, JetBlue warned investors its revenue might decelerate in Q4 on a sequential basis due to delayed business travel recovery. These concerns were exacerbated when the Omicron variant was detected which led to the cancellation of travel plans and crew-related shortages.
In Q4 of 2021, JetBlue saw its sales fall by almost 10% compared to Q4 of 2019, which was in line with its initial guidance. This allowed JetBlue to end the quarter with an adjusted EBITDA of $31 million which was again near the high end of management guidance. Comparatively, its adjusted net loss stood at $0.36 per share.
In Q1 of 2022, JetBlue estimates revenue to fall between 11% and 16% compared to the same period in 2019. Additionally, unit cost inflation might increase by double digitals relative to 2019.
The verdict
Shares of American Airlines might seem attractive, especially given its forecast to report adjusted earnings between $4 and $6 per share with $50 billion in sales by 2024. However, the company has repeatedly missed consensus estimates in recent years. American Airlines also ended 2021 with a debt balance of $46 billion which includes lease liabilities. It would take the company multiple years of consistent profits to de-leverage its balance sheet.
On the other hand, while still unprofitable, JetBlue is on track to narrow its losses from $2.51 per share in 2021 to $0.18 per share in 2022. The competition in the airline sector is bound to gain momentum in the upcoming years. Budget airline companies such as JetBlue plowed in capital to expand their fleets amid COVID-19 to gain market share on the rebound.
While American Airlines is trading near consensus price target estimates, JetBlue Airways is trading at a 20% discount to 12-month average price targets right now. Further, its lower debt levels and narrower losses, make JetBlue a better bet.
AAL shares were trading at $17.17 per share on Wednesday morning, down $0.67 (-3.76%). Year-to-date, AAL has declined -4.40%, versus a -5.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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