This Big Bet on International Growth Could Hurt American Airlines Stock

James Brumley

The past year and a half haven’t been easy for American Airlines (NASDAQ:AAL). American Airlines stock is down a painful 55% from its January-2018 peak.

This Big Bet on International Growth Could Hurt American Airlines Stock

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Every time it looked like it might snap out of that funk, it’s managed to find an even lower low. The weakness will ultimately serve as a buying opportunity, even if this month’s new 52-week lows don’t end up being the ultimate bottom.

At a trailing P/E of 7.8 and a forward-looking P/E of 4.6, AAL stock is priced as if an apocalypse is inevitable. That is to say, the worst-case scenario is already priced in, and then some.

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As to when American Airlines stock will rebound though, and how well it recovers, most of that will hinge on the carrier’s international business. Much of it’s being rearranged, largely for the purpose of expansion.

Expansion Plans and American Airlines Stock

At first glance, news that American Airlines was adding another flight to and from Phoenix to Hermosillo, Mexico, could be shrugged off. Airlines add, and drop, regular flights all the time, as dictated by changing demand.

This addition is tacked on to a string of new nonstop flights to and from Mexico has already added this year, however. American also added two new flights from Dallas to Tokyo two weeks ago. Around the same time, it announced a new route from Dallas and Tel Aviv, Israel, restoring service that was discontinued in early 2016.

London, Athens, Madrid and Munich were also destinations of new flights from American this summer, even if only on a temporary basis.

Africa is also an increasingly important destination from the United States. Vasu Raja, vice president of Network & Schedule Planning at American Airlines, explains:

“We see the ability to develop Africa over multiple years – three, five, seven years. Today, we go fly to Casablanca, but through our partnership through Royal Air Maroc we can connect customers to a number of destinations in Africa. As those connections continue to grow, we’ll be able to create value for more customers, and as we see where it is the customers grow, we can go to those places nonstop from a U.S. hub.”

The same may apply all over the world now, however.

“I think in three years what you will see is a much more globally diversified American Airlines that is operating in the markets that three or four years ago that it wouldn’t have dared to dream about,” Raja added.

Longevity in Question

The underpinnings of the expansion are debatable, as is the longevity of the demand.

Chief among concerns is a trade war, largely being fought with tariffs, between China and the United States that could create a ripple effect across the globe. Some fear it already has.

The current administration hasn’t been particularly dovish with Mexico in terms of trade either, calling into question the need for American Airlines’ new routes to several destinations in Latin America.

Concerned owners of American Airlines stock will also point out that the new routes added to Iceland in the middle of last year, in response to a travel boom at the time, are all going to be discontinued by October.

“The likely problem is that the airlines jumped in too quickly as soon as they saw a boom in Iceland’s visitor numbers without anticipating the slowdown that will likely occur,” Laura Beaton, Travel & Tourism analyst with London-based GlobalData said of the recently-added routes.

It’s entirely possible all carriers could be making a similar mistake with the addition of several new international routes.

Changing Air Travel and American Airlines Stock

On the other hand, it’s also possible the air travel industry is at a critical turning point, where incomes are high enough everywhere and air travel is affordable enough everywhere that new international demand is here to stay.

One underlying evolution driving that paradigm shift may be the jets themselves.

It’s difficult to call the early days of the 737-MAX series of passenger jets from Boeing (NYSE:BA) anything but a disaster. Two fatal crashes of the plane just a few months after they first took to the air have proven incredibly disruptive to previously-planned routes that have since been canceled or serviced by other planes with a different number of seats.

Still, beyond the computerized safety system that appears to be the culprit of both crashes, the 737-MAX had proven to be 20% more fuel-efficient than comparable planes, thanks to the structural design of the aircraft.

That upside still stands. Other aircraft designs will certainly borrow from the best aspects of the 737 MAX.

Another key development? More, and better, infrastructure. More international hubs are being established, and more airports are being built.

Meanwhile, existing airports are being improved in a way that allows them to accommodate more planes and passengers. This is particularly true of so-called “emerging and developing economies,” where American Airlines is slowly but surely pushing its way in.

Looking Ahead for American Airlines Stock

In its long-term air travel outlook recently updated by International Air Transport Association (IATA), the organization predicts that the number of annual air travelers will more than double over the course of the next twenty years.

By 2040, more than 20 billion total air trips are expected to be made. China and India will be featured prominently in that growth, as will Latin America. American Airlines is simply looking to stay ahead of that trend. Rival airlines like Delta Air Lines (NYSE:DAL) and United Airlines Holdings (NASDAQ:UAL) are seeking to do the same.

But, somehow for the perpetually-less-profitable American Airlines, the effort to expand internationally is an opportunity to grow its margins to levels more like those of its peers.

Still, it’s an awfully big risk, if the industry’s growth trend isn’t as reliable as it seems on the surface.

As of the time of this writing, James Brumley did not hold a position in any of the aforementioned securities. To learn more about James, visit his site at jamesbrumley.com, or follow him on twitter at @jbrumley.

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