American Airlines vs. SkyWest: Which Airline Stock is a Better Investment?

American Airlines Group, Inc. (AAL) in Fort Worth, Tex., and SkyWest, Inc. (SKYW) in St. George, Utah, are two popular airliners in the United States. AAL provides scheduled air transportation services for passengers, cargo, and mail service through its hubs and partner gateways worldwide. SKYW offers aircraft maintenance, airline reservations, conference travel, hotel reservation, car hire, online booking, and visa services worldwide. The company also leases regional jet aircraft and spare engines to third parties.

Although a strong vaccination drive helped the airline industry witness an uptick in demand earlier this year, the resurgence of COVID-19 cases will likely darken the industry’s outlook through the fall. According to the International Air Transport Association (IATA), the industry is expected to suffer a $47.70 billion overall loss in 2021. However, an anticipated increase in vaccination rates across the country with the FDA’s full approval yesterday of Pfizer-BioNTech's two-dose vaccine should help the industry return to its recovery path. Therefore, both AAL and SKYW could witness a solid recovery later this year or early next year.

While SKYW has gained 2.9% in price year-to-date, AAL has surged 21.2%. In terms of their past year’s performance, AAL is a clear winner with 57.2% gains versus SKYW’s 38.3% returns. But, which of these stocks is a better pick now? Let’s find out.

Latest Developments

In an announcement dated August 24, 2021, AAL said it is reopening its Flagship lounges and Flagship First Dining on September 14, offering a premium dining experience to customers during travel. With its  revamped menus designed in collaboration with popular chefs, AAL hopes to generate improved profits this fall.

On August 9, 2021, SKYW signed a multi-year capacity purchase agreement with Delta Air Lines, Inc. (DAL) to purchase and operate 16 new E175 aircraft. Scheduled to begin service in the first half of 2022, the 16 new E175 aircraft will replace 16 SKYW-owned CRJ900s. With these new, dual-class aircraft, SKYW hopes to serve its partners and passengers better and work toward its full domestic recovery in the coming months.

Recent Financial Results

AAL’s total operating revenues for its fiscal second quarter, ended June 30, 2021, increased 35.3% year-over-year to $7.48 billion. The company’s operating income came in at $441 million, versus a $2.49 billion loss  in the prior-year period. AAL’s net income has been reported at $19 million for the quarter, compared to a $2.07 million loss in the prior-year period. Its EPS came in at $0.03, versus a $4.82 loss per share in the year-ago period. As of June 30, 2021, the company had $465 million in cash and restricted cash.

For its fiscal second quarter, ended June 30, 2021, SKYW’s total operating revenues increased 87.7% year-over-year to $656.99 million. The company’s operating income came in at $115.02 million, versus a $4.40 million loss in the prior-year period. SKYW’s net income has been reported at $61.99 million for the quarter, compared to a $25.72 million loss in the year-ago period. Its EPS was  $1.22, versus a $0.51 loss per share in the prior-year period. The company had $955.68 million in cash and marketable securities as of June 30, 2021.

Past and Expected Financial Performance

AAL’s total assets have grown at an 11.3% CAGR over the past three years. Analysts expect AAL’s revenue to increase 76.9% year-over-year in the current year and 37.9% next year. Its EPS is expected to remain negative in the current year.

In comparison, SKYW’s total assets increased at a 5.7% CAGR over the past three years. Analysts expect SKYW’s revenue to increase 23.9% year-over-year in the current year and 18.4% next year. Its EPS is expected to increase 1394.1% in the current year.

Profitability

AAL’s trailing-12-month revenue is almost 8.3 times what SKYW generates. However, SKYW is more profitable, with an 18.8% gross profit margin versus AAL’s negative value.

Also, SKYW’s 8.6% and 3.8% respective EBITDA  and net income margins compare favorably with AAL’s respective negative values.

Valuation

In terms of non-GAAP forward P/G, SKYW is currently trading at 11.77x, compared to AAL’s negative  2.73x.

And, in terms of trailing-12-month EV/Sales, AAL’s 2.27x is 14.5% higher than SKYW’s 1.94x.

POWR Ratings

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

SKYW has a B grade for Value, which is consistent with its lower-than-industry valuation ratios. SKYW’s 1.94x trailing-12-month EV/Sales is 3.1% lower than the 2x industry average. However, AAL’s C grade for Value is in sync with its slightly higher-than-industry valuation ratios. The company has a 2.27x trailing-12-month EV/Sales, which is 13.1% higher than the 2x industry average.

In terms of Sentiment, SKYW has been graded an A, which is consistent with favorable analysts’ estimates regarding its EPS growth. Analysts expect SKYW’s EPS to improve 1394.1% year-over-year to $2.20 in the current year. However, AAL’s D grade for Sentiment is in sync with analysts’ expectation that its EPS will remain negative in the current year.

Of the 31 stocks in the Airlines industry, AAL is ranked #15, while SKYW is ranked #1.

Beyond what we’ve stated above, our POWR Ratings system has also rated SKYW and AAL for Growth, Quality, Momentum, and Stability. Get all AAL ratings here. Also, click here to see the additional POWR Ratings for SKYW.

The Winner

Although a resurgence of COVID-19 cases has led to booking cancellations, both AAL and SKYW should recover later this year. However, we think its higher profitability and relatively lower valuation make SKYW a better buy now.

Our research shows that the odds of success increase if one bets on 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 $0.06 (-0.30%) in after-hours trading Tuesday. Year-to-date, AAL has gained 25.75%, versus a 20.60% 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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