The airline industry is experiencing strong growth despite higher fuel costs, thanks to strong travel demand and the integration of advanced technologies, ensuring steady growth.

Amid these favorable tailwinds, we look into the fundamentals of American Airlines Group Inc. (AAL) and Air Canada (ACDVF) to gauge their investment prospects. Before diving deeper into the fundamentals of these stocks, let’s discuss why the airline industry is well-positioned for growth.

In August 2023, the International Air Transport Association (IATA) reported a 28.4% increase in total traffic compared to August 2022, with international traffic up by 30.4%. All markets saw double-digit year-over-year growth, and international Revenue Passenger Kilometers (RPKs) reached 88.5% of their August 2019 levels.

In September 2023, U.S. air ticket sales, as reported by Airlines Reporting Corp. (ARC), rose 3% year-over-year to $7.6 billion. Total passenger trips increased by 4% to 22.1 million, with a 3% rise in domestic trips and a 6% increase in international trips. The growth is linked to rising travel demand and higher disposable incomes.

Furthermore, the aviation industry's growing use of Artificial Intelligence (AI), including autonomous aircraft and predictive maintenance systems, is set to impact market potential. These innovations improve operational efficiency, passenger safety, and the overall experience. The AI in aviation market is projected to achieve a 20% CAGR between 2023 and 2032.

Considering these conducive trends, let’s examine the fundamentals of the two stocks from the Airlines industry, starting with the one ranked lower from the investment point of view.

Stock to Hold:

American Airlines Group Inc. (AAL)

AAL operates as a network air carrier. The company provides scheduled air transportation services for passengers and cargo through its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C., as well as through partner gateways in London, Doha, Madrid, Seattle/Tacoma, Sydney, and Tokyo.

In terms of the trailing-12-month Return on Total Capital, AAL’s 8.36% is 21.9% higher than the 6.86% industry average. Likewise, its 5.34% trailing-12-month Capex/Sales is 80.6% higher than the industry average of 2.95%. Furthermore, the stock’s 26.84% trailing-12-month gross profit margin is 11.6% lower than the industry average of 30.35%.

For the third quarter that ended September 30, 2023, AAL’s total operating revenues increased marginally year-over-year to $13.48 billion. However, its operating loss came in at $223 million, compared to an operating income of $930 million in the prior year's quarter.

For the same quarter, its net income and EPS, excluding net special items, came in at $263 million and $0.38, representing decreases of 45% and 44.9% year-over-year, respectively.

For the quarter ending December 31, 2023, AAL’s EPS is expected to decrease 96.5% year-over-year to $0.04. However, its revenue for the quarter ending March 31, 2024, is expected to increase 4% year-over-year to $12.67 billion, respectively.

It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has declined 33.4% to close the last trading session at $11.15.

AAL’s uncertain outlook justifies its overall rating of C, which translates to Neutral in our proprietary POWR Ratings system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.

It has a C grade for Quality. It is ranked #16 out of 29 stocks in the Airlines industry. To access AAL’s grades for Growth, Value, Momentum, Stability, and Sentiment, click here.

Stock to Buy:

Air Canada (ACDVF)

Headquartered in Saint-Laurent, Canada, ACDVF provides domestic, U.S. transborder, and international airline services. The company provides scheduled passenger services under the Air Canada Vacations and Air Canada Rouge brand names in the Canadian market, the Canada-U.S. transborder market, and the international market to and from Canada.

On October 28, ACDVF launched a seasonal flight from Vancouver to Dubai, connecting Western Canada with the Middle East. This four-times-a-week service compliments ACDVF's year-round Toronto-Dubai flights, providing travelers with connections spanning Western Canada, Alberta, the Western United States, the Middle East, the Indian subcontinent, and East Africa.

ACDVF’s Boeing 787 Dreamliner aircraft with three cabin classes operate these flights.

On October 23, ACDVF introduced its upgraded Airbus A321, featuring larger overhead bins, improved seating, Bluetooth audio, exterior cameras for real-time flight views, full-color LED mood lighting, and high-speed internet, enhancing the customer experience. The upgrades will be applied to the Airbus A320s as well, reducing weight and fuel consumption while improving sustainability.

Mark Nasr, Executive VP, Marketing and Digital, and President of Aeroplan, ACDVF, expressed pride in inviting customers to try the upgraded cabins, aligning A320s and A321s with the popular A220 experience, introducing new features like exterior aircraft camera feeds, Bluetooth, and free high-speed internet, and planning to test more in-flight experiences on the A321 and expand them across the fleet.

In terms of the trailing-12-month Capex/Sales, ACDVF’s 7.38% is 149.9% higher than the 2.95% industry average. Likewise, its 7.61% trailing-12-month Return on Total Assets is 51.2% higher than the industry average of 5.03%. Furthermore, the stock’s 10.59% trailing-12-month net income margin is 74% higher than the industry average of 6.09%.

For the third quarter ended September 30, 2023, ACDVF’s operating revenues increased 19.2% year-over-year to C$6.34 billion ($4.58 billion). Its net cash flows from operating activities rose 40.7% year-over-year to C$408 million ($294.51 million).

Its adjusted net income and adjusted EPS increased 197.2% and 218.7% over the prior year quarter to C$1.28 billion ($923.94 million) and C$3.41, respectively. Additionally, its adjusted EBITDA increased 73.1% year-over-year to C$1.83 billion ($1.32 billion).

Street expects ACDVF’s revenue for the quarter ending December 31, 2023, to increase 6.4% year-over-year to $3.70 billion. It surpassed Street EPS estimates in three of the trailing four quarters. Over the past six months, the stock has declined 13.8% to close the last trading session at $12.08.

ACDVF’s POWR Ratings reflect strong prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

It is ranked first in the same industry. It has an A grade for Value and Quality and a B for Growth. Click here to see the other ratings of ACDVF for Momentum, Stability, and Sentiment.

What To Do Next?

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AAL shares were trading at $11.04 per share on Wednesday afternoon, down $0.11 (-0.99%). Year-to-date, AAL has declined -13.21%, versus a 11.06% rise in the benchmark S&P 500 index during the same period.

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.

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