Goldman Sachs (NYSE:GS) has resumed coverage on American Airlines (NASDAQ:AAL) stock with a Neutral rating and a price target of $15.00. The investment firm anticipates that American Airlines will gradually recover the revenue share it has lost due to distribution issues. The process is expected to be protracted because corporate contracts typically span one to two years.
American Airlines, like its industry peers, is currently negotiating a new contract cycle with its unionized labor force. Goldman Sachs is factoring in the cost headwinds that will affect the airline's unit costs through 2025.
These include new labor agreements with flight attendants, which are expected to have a full-year impact from the first quarter of 2025 to the third quarter of 2025, and with fleet service and mechanics, whose deal was ratified in October 2024 and will also fully impact 2025.
The firm's analysis suggests that American Airlines may see a slower-than-average improvement in profitability in 2025 due to less benefit from stronger corporate and premium revenue trends, coupled with the timing of the labor agreements. Over a longer horizon, Goldman Sachs forecasts that the airline will continue to reduce its debt through 2027.
This deleveraging is supported by manageable capital expenditures and an anticipated improvement in profitability, which should result in a free cash flow that is at the higher end of the firm's industry projections.
In other recent news, American Airlines reported a robust third-quarter with a pretax profit of $271 million and earnings per share of $0.30, exceeding estimates, and total revenue reaching $13.6 billion, marking a 1.2% year-over-year increase. The company has outlined plans to reduce total debt by at least $13 billion by the end of 2024 and grow premium seating by 20% by 2026.
In a significant development, the airline failed to overturn an antitrust ruling blocking a partnership with JetBlue Airways (NASDAQ:JBLU). However, American Airlines has extended its Tax Benefit Preservation Plan to 2027, aimed at protecting the company's tax assets and reducing federal income tax liabilities.
On the analyst front, Barclays (LON:BARC) upgraded the stock from Underweight to Equal-weight, raising the price target to $16.00. Jefferies increased its price target for American Airlines to $12.00, maintaining a "Hold" rating, reflecting an improved outlook for the company's fourth-quarter revenue metrics.
Similarly, Citi raised its price target to $16.00, keeping a "Buy" rating, and TD (TSX:TD) Cowen along with BofA Securities increased their price targets to $10.00. These are recent developments that investors may find noteworthy.
InvestingPro Insights
To complement Goldman Sachs' analysis, recent data from InvestingPro offers additional insights into American Airlines' financial position. The company's market capitalization stands at $9.37 billion, reflecting its significant presence in the Passenger Airlines industry. Despite facing challenges, American Airlines has shown resilience with a strong return over the last three months, posting a 41.33% price total return.
InvestingPro Tips highlight that American Airlines operates with a significant debt burden, which aligns with Goldman Sachs' focus on the company's ongoing deleveraging efforts. This debt situation underscores the importance of the airline's strategy to reduce leverage through 2027, as mentioned in the report.
Another relevant InvestingPro Tip indicates that 8 analysts have revised their earnings upwards for the upcoming period. This positive sentiment from analysts could potentially support the gradual recovery in revenue share that Goldman Sachs anticipates.
For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for American Airlines, providing a broader perspective on the company's financial health and market position.
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