On Tuesday, Citi reaffirmed its Buy rating on American Airlines (NASDAQ:AAL) with a steady price target of $20.00. The airline's first-quarter investor update presented a dual scenario. Management maintained its previous forecast for unit revenue and operating expenses excluding fuel. However, they acknowledged an uptick in fuel prices.
Citi highlighted that American Airlines, despite having a comparable EBIT margin to 2019 and an improved free cash flow (FCF) profile, is still trading significantly below its pre-pandemic valuation.
The airline's financial outlook, as per the update, shows persistence in some areas and challenges in others. While the unit revenue and non-fuel operating expenses remain on track as forecasted, the rising fuel costs could impact the company's profitability. This increase in fuel prices is a new development that may affect American Airlines' operational expenses moving forward.
American Airlines' ability to sustain its EBIT margin in comparison to 2019 levels, along with a stronger FCF profile, suggests a stable financial footing. Despite these positive indicators, the market valuation of American Airlines has not yet reached the levels seen before the pandemic hit, indicating a potential discrepancy between the company's financial health and its stock market performance.
The airline industry has been navigating through a turbulent period since the onset of COVID-19, with varying degrees of recovery across different carriers. American Airlines' latest update provides investors with a snapshot of its current financial trajectory and operational challenges, particularly in the context of fluctuating fuel prices.
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