American Airlines Turns Profitable But Watch Its Load Factor

Mark Hake

Expect to See More Cramped Seating, As Its Load Factor Is Still Well Below Average

American Airlines reported a Q3 net income of $169 million on Oct. 21, the second net income it has posted in a row. However, this was much higher than the Q2 net income of just $19.0 million.

However, compared to two years ago, before Covid-19 ravaged its earnings, American Airlines still has a long way to go. For example, in Q3 2019 the airline posted a net income of $425 million.

That means American Airlines is still running at less than 40% of the profitability it used to have.

Load Factors

One major reason for this is what airline analysts call the "load factor." As you might imagine, this works out to the number of seats sold (and cargo shipped) as a percent of its capacity during the quarter.

For example, during Q3 American Airlines could have sold 61K in passenger miles. But it only sold 48K passenger miles, so its load factor was 78.7%. Over 20% of the average flight miles went unsold during the quarter.

Compare this to Q3 in 2019. It could have sold 66.3K in available seat miles. In the end, it sold 57.4K, giving it a much higher load factor of 86.6%. In this case, less than 15% of the seats were left unsold.

As a result, you can probably expect to see American Airlines increase the number of seats filled up during the holidays this year.

Expect to See Bargains Closer to Flights Departure Days - Or Not

One way it can do this is to lower prices as it gets closer to the time a flight takes off. As a result, it can increase its load factor. But it might not have to do as much of this bargain selling as you think.

Even though American Airlines does not publish its breakeven load factor, we can estimate what is needed. For example, as I mentioned earlier, during Q2, the company made a slight profit of $19 million. Its load factor during the quarter was 77% on 54.55K available seat miles during the quarter.

Therefore its breakeven load factor is probably close to 77%, although slightly higher fuel prices might raise it to 78% to 79% or so. This is on par with the 78.7% load factor posted in Q3.

In addition, American Airlines said that it expects its capacity during Q4 will be 11% to 13% below Q4 2019. At that time it had 60,985 in available seat miles (ASMs). So its Q4 2021 capacity will likely be about 53K to 54.3K in ASMs or 53.65K on average.

As a result, since the breakeven load factor will be 78.5%, we expect American Airlines will have to sell over 42.1K in passenger seat miles just to break even. This might now be as much of an issue as we think since it sold 48K in Q3.

Therefore, the company might not have to do as much bargain selling as you would think. For example, traffic volumes will naturally be higher during Thanksgiving and Christmas travel seasons. It probably will be able to sell the 48K in available seat miles it did last quarter and its breakeven will be just 42K in ASMs.

What This Means For Travelers and Investors

Therefore, don't be surprised if the airline doesn't discount its tickets as much as you might think, despite its low profitability. As long as it is over breakeven it is not under as much pressure.

In addition, if you are traveling standby, don't expect to see as many seats available per flight, especially around holiday travel peaks - at least for American Airlines.

These are my conclusions from reviewing the company's financials and its load factors. The bottom line is that the company is now profitable. It is not under as much pressure as before, even though its capacity is still down from two years ago.

On the other hand, this also makes American Airlines stock (AAL) a very good investment. The market still does not believe that the company has been able to turn around. It appears to be quite cheap at less than one-half of 1 times sales for 2021, according to Seeking Alpha's analyst surveys. That is a very cheap valuation metric right now.

Also, you might want to follow me - don't forget to fully "Follow" me and make sure to download the Newsbreak app to become a Registered Follower. This way you can also see all my articles in the past. Click on the Follow link underneath my profile name.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock, security, or crypto, as I am not undertaking to induce you to buy or sell securities.

I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

This represents my analysis of American Airlines (AAL) and it is not meant to provide you with specific advice in your own situation. I do not own AAL stock right now, but I may buy it in the near future. Your own situation could be different and this is not a recommendation to purchase the stock.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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