American Airlines AAL is benefiting from robust air travel demand. The company’s expansion efforts are encouraging. However, elevated operating expenses and weak liquidity are hurting AAL’s prospects.

Factors Favoring AAL

American Airlines is rolling out a new software platform to streamline the boarding process. It alerts agents and customers if a passenger boards early, with an easy override for companions in earlier groups. The platform also provides agents with insights into group sizes and flight connection times, improving boarding efficiency and reducing missed connections. By consolidating multiple apps into one, it simplifies tasks for agents. The technology is being expanded to more than 100 airports, including Austin and Atlanta, to enhance operations and customer service.

The company's top line is bolstered by strong demand across key revenue segments. In the third quarter of 2024, managed business revenues grew 6% year over year, and premium revenues jumped 8% year over year, with only a 3% capacity increase, highlighting the airline's ability to attract high-value customers. Loyalty revenues also saw a 5% year-over-year rise, with AAdvantage members contributing 72% of premium cabin revenues. The American Airlines AAdvantage program offers personalized travel experiences by allowing members to earn and redeem miles for various rewards and benefits.

AAL’s robust expansion efforts are boosting its prospects as it continues to enhance its fleet and infrastructure. In the third quarter of 2024, American Airlines committed to purchasing 14 used Bombardier CRJ 900 aircraft, with deliveries scheduled from 2024 through 2026. This move strengthens AAL’s fleet, allowing the airline to expand its capacity and improve operational efficiency.

Owing to such tailwinds, AAL shares have rallied 28.8% quarter to date compared with its industry’s 6.4% growth.

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AAL: Key Risks to Watch

American Airlines' financial stability is facing pressure due to high expenses and weak liquidity. In the third quarter of 2024, while total operating costs slightly decreased, they remained elevated, largely driven by rising labor expenses. Labor costs, including salaries, wages and benefits, accounted for 30.2% of total operating costs and rose by 3.1% compared to the previous year.

Moreover, AAL exited the third quarter of 2024 with a current ratio (a measure of liquidity) of 0.54. A current ratio of less than 1 indicates that the company holds sufficient cash to meet its short-term obligations.

AAL’s Zacks Rank

AAL currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Investors interested in the Zacks Transportation sector may consider Westinghouse Air Brake Technologies WAB and SkyWest SKYW.

Westinghouse Air Brake Technologies currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

WAB has an expected earnings growth rate of 2.01% for the current year. The company has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters and missed once, delivering an average beat of 9.46%. Shares of WAB have risen 68.5% in the past year.

SkyWest currently sports a Zacks Rank #1. SKYW has an expected earnings growth rate of 4.07% for the current year.

The company has an encouraging track record with respect to the earnings surprise, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 79.12%. Shares of SKYW have climbed 128.1% in the past year.

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