American Airlines Share Gain Shows That Maybe CEO Parker Knows Something After All
Tuesday was the kind of day that makes you think that maybe American Airlines (AAL) - Get Report CEO Doug Parker knows something after all, a day when the skies cleared for the airline industry.
American shares rose 11% after the carrier announced a new credit card deal. United (UAL) - Get Report shares rose 9% after the carrier said second-quarter passenger revenue per available seat mile fell less than expected. Delta (DAL) - Get Report shares rose 5% after Deutsche Bank analyst Mike Linenberg upgraded American, Delta and United.
It was just one day, but it was a day when the Bloomberg U.S. Airlines Index rose 6.5%, the biggest gain since November 2014, after a first half during which the index was headed for its biggest annual decline in five years.
Parker has been saying for months that everybody who has been selling airline shares this year is wrong, that the industry has changed, that losses are a thing of the past.
In April, on American's first-quarter earnings call, Parker said most investors didn't understand the airline industry. "In the almost 30 years now that I've been in this business, I can't remember a bigger disconnect between what we're seeing in our airline and in our forward prospects and how the market is treating our stock," he said.
At the time American shares were trading at $38.99, down 8% year to date after opening 2016 at $42.35.
By June, shares were trading at $33.40, down 21% for the year, obviously headed in the wrong direction. Parker stuck to his guns. He said the airline industry wasn't going to see losses anymore.
"Our industry has been fundamentally and structurally changed," Parker said at American's annual meeting. "Things are different now.
"When down cycles come, you won't see losses," he said. "The bad years won't be cataclysmic. They will just be less good than the good years."
Some people guffawed and Wall Street retained its myopic focus on passenger revenue per available seat mile, an arcane metric that tells what is happening with revenue but doesn't even consider what might happen with cost.
So if your cost goes down by a dollar and you cut prices by a dime, your PRASM declines and you become a company headed in the wrong direction.
In his report on Tuesday, Linenberg said "enough."
Linenberg raised ratings on American, Delta and United to buy from hold.
"We are of the view that all known negatives (Brexit, tepid global economic growth, over-supplied markets, etc.) are more than fully discounted in the share prices," he wrote.
As for PRASM, Linenberg said stocks usually hit bottom before PRASM trends start to improve. He said shares in the three carriers are trading at just 6.4 times his 2016 earnings estimates and just 6.8 times his 2017 earnings estimates.
PRASM should improve in the second half of 2016 and into 2017, given "moderating capacity growth, strengthening of key currencies (save for the British pound), higher fuel surcharges and a decent U.S. economic backdrop," Linenberg wrote.
"In light of the current valuations, we think downside is limited and that therefore investors can afford to be early given the rapidity in which airline share prices can appreciate once it becomes apparent that trends are indeed getting better," he said.
In another report issued Tuesday, Cowen & Co. analyst Helane Becker reiterated an outperform on American shares. She noted American is down 18% year to date while the Bloomberg U.S. Airline index is down 14%.
"Leaving the stock for dead makes no sense now," Becker wrote.
American shares dipped slightly Wednesday morning.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.