Is American Airlines (AAL) the Best Airline Stock to Buy? Here’s What Hedge Funds Think
When we think about solid investments in 2024, American Airlines Group Inc. (NASDAQ: AAL) has consistently attracted attention, particularly among hedge funds. Let’s explore why hedge funds are bullish on American Airlines and if it truly ranks as the best airline stock to buy this year.
Why Hedge Funds Are Bullish on Airline Stocks
Airlines have faced intense headwinds in recent years, from the economic aftermath of the pandemic to fluctuating fuel costs. But here’s the surprising part: despite these hurdles, the global airline industry is on a steady recovery path, largely thanks to international travel rebounding to near pre-pandemic levels.
A few key stats underscore this trend:
- According to the International Air Transport Association (IATA), 2023 saw international tourism reach 88% of 2019 levels.
- Global airline revenue is projected to hit $996 billion by 2024, marking a 19% increase over 2019’s peak.
With rising middle-class demand for international travel, and a steady global economic outlook, hedge funds are once again eyeing airline stocks like AAL for potential gains.
American Airlines Group Inc. (AAL): By the Numbers
American Airlines Group Inc. has grown to become one of the most recognisable names in the airline industry, largely due to its scale:
- Fleet Size: Over 900 aircraft.
- Daily Flights: Approximately 6,700.
- Network: 350+ destinations worldwide, including major hubs like Charlotte, Chicago, Dallas-Fort Worth, and New York City.
In the second quarter of 2024, American Airlines reported record revenue of $14.3 billion, reflecting a year-over-year increase, despite several challenges in balancing domestic supply and demand. While unit revenue dropped by 5.6%, the company’s operational size and reach have solidified its presence as a hedge fund favourite.
Key Drivers: International Travel and Fuel Costs
1. The Rise of International Travel
International travel has returned with force, bringing tremendous benefits to airlines. Regions like the Middle East and Europe have already surpassed 2019 levels. For American Airlines, this means:
- Expanded long-haul routes, especially to high-demand regions.
- Increasing pricing power as airlines adjust capacity and pricing strategies.
While domestic travel has seen fluctuating demand, the rising demand for international flights offers American Airlines an avenue for revenue stability and potential growth.
2. Fuel Costs and Operational Adjustments
Fuel remains one of the largest operating costs for airlines, often accounting for up to 30% of total expenses. Following a spike in fuel prices, American Airlines, like others, has strategically reduced excess domestic capacity to protect margins and optimise resources.
Additionally, in response to high operating costs, American has implemented cost-saving measures aimed at $400 million in 2024. With fuel costs now stabilising, these measures have positioned the company for improved profitability as we head into the end of 2024.
Hedge Fund Sentiment and Investment Strategies
Hedge funds are backing airline stocks as part of a broader trend in travel and leisure investments, capitalising on the economic recovery. In fact, as of June 2024, 38 hedge funds had stakes in American Airlines Group, reflecting substantial confidence in the stock’s long-term growth.
One factor driving this confidence is American’s strong liquidity position:
- $850 million in free cash flow during Q2 2024.
- Total liquidity of $11.7 billion.
- Over $13 billion in debt reductions since 2021, with plans for further reductions by 2025.
American Airlines and the Competitive Landscape
Comparing AAL to other airline stocks, we can observe several competitive advantages:
- Scale and Reach: American’s extensive domestic and international network provides unique opportunities for revenue diversification.
- Operational Strategy: Adjustments in capacity reflect AAL’s ability to balance supply with demand strategically.
However, other hedge fund-backed stocks in the aviation space are also notable. Carriers with a focus on international travel, low-cost structures, and less exposure to domestic oversupply may hold an edge.
Is AAL the Best Airline Stock? What the Experts Say
For hedge fund managers, American Airlines presents an attractive balance between risk and reward. Its recent quarterly performance, strong cash flow, and strategic response to post-pandemic market shifts have solidified its standing. According to Tony Bancroft from Gabelli Funds, American Airlines’ positioning in an industry supported by a 12-year aircraft order backlog highlights its growth potential.
Beyond American, Bancroft emphasises a global trend with significant growth potential: China’s middle class is expanding, driving massive demand for air travel. As China accounts for around 20% of new aircraft orders, American Airlines could benefit indirectly through partnerships and route expansions with other global carriers.
Hedge Funds’ Investment Approach: Mimicking the Pros
Investors looking to mimic hedge fund strategies often focus on picking top-performing, high-liquidity stocks. Research has shown that this approach can beat the market, especially by following small-cap and large-cap stocks favoured by hedge funds.
Conclusion: Is AAL Worth Considering?
In a recovering travel sector, American Airlines Group Inc. (AAL) continues to stand out for hedge funds. Its combination of size, liquidity, and operational adjustments in the wake of economic challenges underscores its investment appeal. However, investors should remain cautious about the potential risks associated with the airline industry, such as fluctuating fuel prices and changes in travel demand.
If you’re interested in stocks driven by both market recovery and hedge fund sentiment, AAL is a compelling option to consider, particularly as the airline sector capitalises on rising global travel demand. Ultimately, though, evaluating AAL’s potential alongside AI stocks, which are rapidly emerging as top hedge fund picks, could diversify and strengthen any investor’s portfolio.
