On June 4, American Airlines (NASDAQ:AAL) stock surged more than 40%. That marks the best one-day performance for AAL stock ever, as shares surged to their highest valuation since March.
So what now? At the session high, shares were up an incredible 120% from the May low. Despite the lofty run — both last week and over the past month of May — shares are still well off American’s previous highs.
In fact, AAL stock is still 45% below its 2020 high, 52% off its one-year high and more than 70% off its three-year high.
So yes, there’s still progress to be made. On the plus side, AAL’s year-to-date performance is now in the upper range of its peers.
Of the major airlines — Southwest Airlines (NYSE:LUV), Delta Air Lines (NYSE:DAL), United Airlines (NASDAQ:UAL) and if you consider it major, Spirit Airlines (NYSE:SAVE) — American Airlines only lags Southwest.
Shares are down 42.4%, behind LUV’s 29.5%. But it’s better than United, Delta and Spirit.
A Closer Look at American Air
So what kick-started this impressive rally? American Airlines made an announcement that shocked investors — both bulls and bears alike. The company said that in July, it expects to fly 55% of its domestic schedule from the same period a year ago. Internationally, it’s at just 20%. Overall, the airline is at about 40% capacity for July 2020 vs. July 2019.
But to be at 55% domestically is truly impressive and not at all what investors were expecting. This comes after comments from Boeing’s (NYSE:BA) CEO that said traffic would likely remain at 25% or less by September and could struggle to hit 50% by December.
He’s not making his predictions out of thin air, either. Thus far in the recovery, June 1 was the busiest day for TSA checkpoints, with 353,000 people passing through its checkpoints. However, that’s just ~14% of the total we saw on the same day a year prior.
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Clearly there is a lack of robust demand among those flying, but that may be set to change as more and more people look to book flights for summer trips. If Delta, United or others announce similar data, this group can continue to rage higher.
I’m not sure what the overall percentage is for each airline booking out into July and August, but if we get a faster-than-expected return to traveling, these names still have room to rip.
For many of these airlines, Q2 and Q3 are the best months for revenue and free cash flow. For AAL stock, it has its best two quarters of revenue in those quarters, but for free cash flow, Q1 tends to be its best. As for net income, Q2 is American’s best quarter, historically speaking.
Trading AAL Stock
So what happens when the company misses its best free cash flow quarter and sees a huge haircut in its Q2 results?
It won’t bode well for American Airlines, unless those delayed trips equate to robust demand in Q3 an Q4. Seeing such a strong start to Q3 — the July bookings — bodes well for this type of recovery. My issue is that, from a financial perspective, AAL stock was already the black sheep among the major airlines. There’s a reason it received a $1 price target amid the pandemic, though that looks pretty foolish in hindsight.
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AAL stock rallied right into the 100-day moving average. On such a strong move, some might say this is setting up for a dip. I’m not so sure. Look at the volume from Thursday’s session; it was robust.
I’m not saying that the 100-day can’t be short-term resistance or an area in which to take some profit. If that’s the case, see if the 23.6% retracement acts as support for the stock. A move over the 100-day puts $20 in play, where AAL stock will find the 38.2% retracement.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
