American Airlines

American earned $446 million operating income on second-quarter sales of $16.7 billion, a 2.7% margin. Management is investing in more premium seating to compete with Delta and United and announced that it intends to regain historical market share among local travelers at some of its US hubs.

Why it matters: American Airlines is locked in a struggle to catch up with Delta Air Lines and United Airlines to woo loyal customers willing to pay or spend mileage points for perks like lounges, preferred seating, and fancy meals. We think American has the tools to compete, but it may also fall prey to the temptation to pursue market share at the cost of profitability. Amid stiff competition from United and Delta, American faced slower top-line growth than it anticipated in 2025, while its unit costs inexorably rose because of increased labor costs. While its fleet is newer than that of other legacy carriers, the seating on these planes was configured before the pandemic and the craze for premium travel took hold. The airline must now reconfigure some of its jets to accommodate more premium seats and perks like in-flight entertainment.

The bottom line: We have increased our fair value estimate for no-moat American to $10.30 from $10.00 per share, reflecting the time value of money. The shares trade 30% above our revised fair value estimate.

Our fair value estimate is $10.30 per share, representing 7.8 times our 2027 GAAP earnings estimate and an enterprise value 7 times our estimated 2027 EBITDAR.

We forecast very low-single-digit revenue growth over our forecast period, during which we expect American to nevertheless take some market share from low-cost providers, though we see record industry yields normalizing. American returned to 2019 levels of capacity in early 2023, and we expect available seat miles to be approximately 12% higher in 2030, our midcycle year, than in 2019.

Over the near term, we still expect strong domestic leisure travel, a strengthening business travel recovery as workers return to offices, and increased international travel due to fewer travel restrictions than in 2022. We anticipate American's load factors will remain above 83% and passenger yields will mostly remain above $0.21 in the postpandemic travel environment.

Our forecast average operating margin for American is 3.7%, fully 640 basis points below the 2015-19 average (margin declined steadily over that period). We no longer see evidence that pandemic-related restructuring has generated labor efficiencies at American. In fact, we observe airlines adding unit costs as they rehire necessary crew and renegotiate labor agreements. We forecast about $0.0421 more in structural costs per available seat mile in American's midterm future than it experienced in 2015-19.

We now expect about $4 billion of capital expenditures annually over the next five years, as the pace of aircraft deliveries begins to improve, still trending below the 2015-19 average of about $5.2 billion. This reflects the completion of American's fleet renewal program, followed by an increasing need to refurbish its older planes to woo more passengers in the premium cabin segment.

We think a very high cost of equity and a high cost of debt are reasonable for this airline, given American’s material financial leverage and cyclicality. Driven by its high debt share in the capital structure, we calculate a 6.4% weighted-average cost of capital to discount American's cash flows.

We assign American Airlines an Economic Moat Rating of None.

Airlines rent seats by the hour on aircraft that fly for decades, their operations and financial results subject to fluctuations beyond their control including volatile fuel costs, growth in labor costs, weather, seasonal variation in travel demand, and ticket prices in most markets. The airline business remains price-competitive, capital-intensive, and labor-intensive, all of which make it difficult for an airline to generate any profit beyond its cost of capital. IATA, an industry group, published estimates in 2020 and 2026 that return on invested capital had only approached the industry's cost of capital once in 30 years, never exceeding it. Our own modeling reflects the same reality for American: over the last decade, it showed volatile annual ROICs ranging from 15% to negative 17%, averaging 5%, below our 6.4% cost of capital estimate. We forecast American’s average ROICs matching its cost of capital in our forecast.

What's more, the industry was pummeled by severe macroeconomic shocks over the last two decades: Sept. 11, 2001, two global pandemics (SARS and Covid-19), and the Great Financial Crisis. Airlines experienced drastic and systemic disruptions to their operations, staffing, and financial viability, resulting in much higher leverage and many bankruptcies. Similar shocks are likely to recur at any time, which no airline can defend itself from, leaving investors persistently at risk of permanent capital loss.

Although the amount of fuel needed to power every flight is known to the gallon by weight at takeoff, the price the airline will pay for it can vary widely over a week, seasonally, and regionally. Most important about fuel prices is that each airline experiences them in more or less the same way: they are a commodity. Most of the time, airlines can pass this cost on to customers by charging more per mile when fuel prices are high. Over the long term, airline CPI, a component of consumer CPI, has been remarkably stable (notwithstanding bumps since 2022 that reflected transitory spikes in fuel prices), implying that aggregate airline fares operate similarly to a commodity, as well.

Major US carriers have partnered with a credit card issuing bank to promote loyalty programs that feature their frequent flyer points. For some, these programs, in which the bank pays the airline more for the points up front than they are technically worth to redeem, represent the lion's share of ongoing operating profit. We do not see these programs as changing the competitive dynamics or structural profitability of the airline. Rather, the airlines have time-shifted when they experience any profit from serving a loyal segment of customers, in many cases redeeming points for perks such as premium seating and lounge access that add incremental cost to provide and maintain.

Through persistent price competition, basic advertised airfares now only include transportation for a passenger (and a small personal item) in an unassigned seat. Labor and other cost inflation have narrowed the historical gap in structural unit costs between discount and full-service carriers. Instead, by charging higher fares to include baggage allowance, seat assignments, and a widening array of other perks, and by exchanging them for collected loyalty points, airlines have tried to establish switching costs among certain segments of their customers. For us to reconsider our moat rating, American’s premium customer segments would have to represent a large enough, loyal enough, and profitable enough portion of revenue to deliver economic profits over an entire cycle. However, we believe that industry fundamentals and price competition will still outweigh segmentation through the next downturn.

The most-costly competition airlines engage in is for aircraft. Every other decade or so, Boeing and Airbus offer new models powered by new engines that can fly farther, carry more passengers, and consume less fuel. We observe a steady increase in available seat miles (ASMs) flown per gallon of fuel consumed across all airlines, as they consistently upgrade their fleets. Delta, United, and American were able to fly an average airplane seat about 60 miles on a gallon of fuel in 2012 and approached 70 in 2023. They fly hub-and-spoke routes with regional and widebody jets that burn more fuel per seat mile than narrow-body jets. Southwest went from 70 ASMs per gallon a decade ago to over 80 in 2023, its mileage advantage versus the big three because it flies only variants of the narrow-body 737 on point-to-point routes. The mileage trend reflects improvements in engine efficiency, wing design, and fuselage materials, and it represents a competitive ratchet that no airline can afford to ignore: multiplied over many hundreds of millions of ASMs per year, even a small difference in fleet efficiency would represent a structural disadvantage for an airline competing on similar routes. Thus, airlines constantly refresh their fleet to stay competitive (new seats, bigger luggage trays, and the like are a side benefit of new planes that also may augment an airline's brand perception for a short time).

Airlines provide invaluable service to their customers and communities, often stimulating the economies of those destinations they connect to the global travel network. However, investors in airlines are literally flying on a wing and a prayer, as we see no prospect for durable economic profit in this industry. Instead, we observe that the duopoly airframe suppliers Airbus and Boeing and the oligopoly engine manufacturers GE, Safran, Pratt & Whitney, MTU, and Rolls-Royce reap the economic reward from providing successively more efficient, powerful aircraft that airlines line up to buy or rent so their service and cost profile can keep up with competing carriers.

American has the youngest fleet among the major US airlines, making its capital-expenditure obligations smaller than those of some competitors in the medium term.

American is wooing back the lucrative corporate customers it alienated with a digital-first strategy after the pandemic.

Demand for air travel has recovered more rapidly from the covid pandemic than the industry's ability to expand capacity to meet it, which is positive for industry profitability.

Substantial financial leverage may constrain American's ability to invest aggressively in capacity or return capital to shareholders, and make it more vulnerable to a downturn or shock to travel demand than its peers.

Business travel recoveries tend to lag economic recoveries, and American has high and evolving business travel exposure.

Although American has a newer fleet than other large US carriers, by average age of its planes, its planes will need to be reconfigured to meet today's passenger preferences for premium seats and high bandwidth on board.