In this article, I have evaluated two leading airline stocks, JetBlue Airways Corporation (JBLU) and American Airlines Group Inc. (AAL), to determine the better pick. Considering the fundamental analysis of both stocks, I believe AAL is the superior choice. Before looking at the reasons, let us discuss this year’s outlook for the airline industry.
After nearly two years of pandemic-related restrictions, airlines have regained profitability as the demand for travel has surged.
The International Air Transport Association (IATA) revised its outlook for airline industry profitability this year. IATA anticipates that airline net profits will amount to $9.8 billion this year, surpassing the previous forecast of $4.7 billion made in December last year. Furthermore, IATA expects the industry’s revenue to grow by 9.7% year-over-year, reaching $803 billion.
Additionally, as per the Airport Council International (ACI) World and SITA, a multinational information technology company providing IT and telecommunication services to the air transport industry, airports are significantly increasing their investment in technology to digitize operations and enhance the passenger journey through self-service options.
This concerted effort towards digitalization is set to reshape the industry and provide a streamlined and efficient travel experience for passengers, which should benefit both JBLU and AAL.
Furthermore, according to internal data from the global payment network UATP, business travel is rapidly rebounding and heading towards a full recovery, contrary to previous predictions that projected a complete comeback by 2024. Additionally, leisure travel has regained its full strength, highlighting a strong resurgence in the travel sector.
AAL is a clear winner when it comes to price performance. AAL has returned 25.3% over the past month compared to JBLU’s 2.6% decline. In addition, AAL has gained 33.2% over the past nine months, higher than JBLU’s 14.9% gain.
Here are the reasons why we think AAL could perform better in the near term:
Recent Positive Developments
On June 14, 2023, JBLU announced its new standard livery featuring a bold and all-blue design emblematic of its role as an innovative, industry-disrupting brand that customers love and trust for travel. The new “icon in the sky” gives JBLU a standout visual design as it expands to new markets and brings customer-centric offerings across the travel industry.
On the other side, on May 16, AAL signed a new lease at Dallas-Fort Worth International Airport that will include $4.8 billion to build a new terminal and renovate one of the five current terminals, airline and airport officials said Tuesday. The work is designed to prepare Fort Worth-based Americans for the expected growth in air travel. DFW is the second-busiest airport in the world.
Recent Financial Results
During the fiscal first quarter ended March 31, 2023, JBLU’s total operating revenues increased 34.1% year-over-year to $2.33 billion. Its operating expenses increased 22.2% year-over-year to $2.57 billion. Its operating loss amounted to $242 million. The company’s net loss stood at $192 million or $0.58 per share.
Conversely, AAL’s total operating revenues rose 37% year-over-year to $12.19 billion in the first quarter ended March 31, 2023. Its operating income came in at $438 million, compared to an operating loss of $1.72 billion in the year-ago quarter.
Also, its net income, excluding net special items, came in at $33 million or $0.33 per share compared to a loss of $1.51 billion or $2.32 per share in the previous-year quarter.
Past and Expected Financial Performance
While JBLU’s revenue grew at a CAGR of 7.7% over the past three years, its EBIT and EBITDA have declined at a CAGR of 55.6% and 18.1%. The company’s EPS is expected to rise 78.9% in the next fiscal quarter. Its revenue is expected to grow 6.4% in the current quarter and 3.1% in the next quarter.
While AAL’s revenue grew at a CAGR of 6.2% over the past three years, its EBIT and EBITDA have soared at a CAGR of 25.2% and 12.6%. The company’s EPS is expected to increase 95% in the current quarter, 16.4% in the next, and 454.6% in the current year. Its revenue is expected to rise 2.1% in the current quarter and 2.2% in the next quarter.
Profitability
JBLU’s trailing-12-month gross profit margin of 24.04% is lower than AAL’s 26.09%. AAL’s trailing-12-month EBIT margin of 7.94% is higher than JBLU’s 0.53%. Moreover, AAL’s trailing-12-month net income margin of 3.39% compares to JBLU’s negative 3.07%.
Therefore, AAL is relatively more profitable.
Valuation
In terms of forward GAAP P/E, AAL is currently trading at 5.86x, lower than JBLU’s 11.58x. AAL’s forward EV/EBIT of 9.94 is lower than JBLU’s 12.89.
Thus, AAL is relatively more affordable.
POWR Ratings
JBLU has an overall rating of C, translating to a Neutral in our proprietary POWR Ratings system. On the other hand, AAL has an overall rating of B, which equates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. JBLU has a grade of C for Value. Its forward EV/EBITDA multiple of 4.74 is 55.6% lower than the industry average of 10.68. However, its trailing-12-month EV/EBIT of 103.07x is 545.4% higher than the industry average of 15.97x.
On the other hand, AAL has a grade of B for Value. Its forward EV/EBITDA multiple of 5.45 is 49% lower than the industry average of 10.68. Its trailing-12-month EV/EBIT of 9.94x is 37.8% lower than the industry average of 15.97x.
Among the 28 stocks in the A-rated Airlines industry, JBLU is ranked #21, while AAL is ranked #9.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Access all the ratings of JBLU here. Also, click here to view AAL’s ratings.
The Winner
The airline industry is making a remarkable recovery this year, with increased profitability as pandemic-related restrictions ease. Factors such as rising disposable income, pent-up travel demand, and the growth of international travel and tourism are fueling this resurgence.
Leading airlines JBLU and AAL stand to benefit from industry tailwinds. However, AAL emerges as a superior pick, given its higher profit margins and lower valuation multiples.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Airlines industry here.
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AAL shares were trading at $16.28 per share on Monday morning, up $0.02 (+0.12%). Year-to-date, AAL has gained 27.99%, versus a 14.34% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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