Big Airlines Are Profitable Again, Is AAL a Better Buy Than Alaska Air Group?

Despite volatility in energy prices and elevated inflation, the rising travel demand in summer led U.S. airlines to turn profitable in the second quarter. With summer coming to an end, the travel demand is expected to decline.

However, easing travel restrictions and high demand for cargo services should help the industry keep recovering. The global airlines market is expected to grow at a 12.7% CAGR to reach $744 billion by 2026. Therefore, popular airline operators American Airlines Group, Inc. (AAL) and Alaska Air Group, Inc. (ALK) should benefit.

AAL provides scheduled air transportation services for passengers, cargo, and mail service through its hubs and partner gateways. On the other hand, ALK provides passenger and cargo air transportation services, including airline and hotel reservations, conference travel, car hire, visa, online booking, cruises, airport, and risk management services.

While AAL gained 1% over the past month, ALK surged 4.1%. But which stock is a better buy now? Let’s find out.

Latest Developments

On August 16, 2022, AAL announced purchasing up to 20 Overture aircraft, with an option for an additional 40 from Boom Supersonic, Inc., the designer of Mach 1.7, 65-88-passenger supersonic airliners. Overture is expected to carry passengers at twice the speed of today’s fastest commercial aircraft and introduce an important new speed advantage to AAL’s fleet.

On August 3, 2022, ALK finalized an agreement with renewable chemicals and advanced biofuels company Gevo Inc. (GEVO) to purchase 185 million gallons of sustainable aviation fuel (SAF) over five years starting in 2026. Using sustainable aviation fuel is a significant part of ALK’s strategy to reach net zero carbon emissions.

Recent Financial Results

For the fiscal 2022 first quarter ended June 30, 2022, AAL’s total operating revenue increased 79.5% year-over-year to $13.42 billion. The company’s operating income came in at $1.02 billion, indicating a 130.6% rise from the prior-year period.

Its net income came in at $476 million, representing a 2405.3% rise from the prior-year period. AAL’s EPS came in at $0.68, indicating a 2166.7% year-over-year improvement. It had $401 million in cash as of June 30, 2022.

ALK’s net sales for its fiscal 2022 first quarter ended March 31, 2022, increased 74.1% year-over-year to $2.66 billion. The company’s operating income came in at $187 million, indicating a 65.9% decline from the prior-year period.

While its net income decreased 65% year-over-year to $139 million, its EPS fell 65.2% to $1.09. The company had cash and cash equivalents of $778 million as of June 30, 2022.

Past and Expected Financial Performance

Over the past three years, AAL’s total assets have increased at a CAGR of 3.1%. Analysts expect AAL’s EPS to be negative for fiscal 2022, ending December 31, 2022, and rise 251.5% in fiscal 2023. The company’s revenue is expected to grow 60.3% year-over-year in fiscal 2022 and 5% in fiscal 2023.

Over the past three years, ALK’s total assets have increased at a CAGR of 4.6%. ALK’s EPS is expected to rise 319.7% year-over-year in fiscal 2022, ending December 31, 2022, and 22.2% in fiscal 2023. The company’s revenue is expected to grow 61.1% year-over-year in fiscal 2022 and 3.9% in fiscal 2023.

Valuation

In terms of forward EV/Sales, AAL is currently trading at 0.86x, 32.3% higher than ALK’s 0.65x. In terms of non-GAAP P/E for the next fiscal year, ALK’s 8.28x compares with AAL’s 8.32x.

Profitability

AAL’s trailing-12-month revenue is five times that of ALK’s. However, ALK is more profitable, with a 23% gross profit margin versus AAL’s 17.5%.

Furthermore, ALK’s net income margin and levered free cash flow of 2.5% and 5.5% compare with AAL’s negative values.

POWR Ratings

While ALK has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, AAL has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both AAL and ALK have been graded a B for Quality, consistent with their higher-than-industry profitability ratios.

In terms of Sentiment, ALK has been graded a B, consistent with favorable analysts’ estimates regarding its EPS growth. Analysts expect ALK’s EPS to improve 319.7% year-over-year to $4.46 in its fiscal year 2022. However, AAL’s D grade for Sentiment is in sync with analysts’ expectations that its EPS will remain negative in the same fiscal year.

Of the 31 stocks in the Airlines industry, ALK is ranked #2, while AAL is ranked #15.

Beyond what we have stated above, our POWR Ratings system has graded ALK and AAL for Growth, Value, Momentum, and Stability. Get all ALK ratings here. Also, click here to see the additional POWR Ratings for AAL.

The Winner

After capitalizing on a growing summer travel demand, the airline industry is well-positioned to keep recovering with easing travel restrictions and growing demand for cargo services. This should benefit AAL and ALK. However, ALK is a better buy based on its lower valuation and higher profitability.

Our research shows that the odds of success increase if one invests in stocks with an overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Airlines industry.

AAL shares fell $0.01 (-0.07%) in after-hours trading Wednesday. Year-to-date, AAL has declined -22.10%, versus a -12.26% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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