Bernstein downgrades American Airlines amid commercial recovery challenges

Investing.com - Bernstein analysts lowered their price targets for American Airlines Group (NASDAQ:AAL) on Monday, with the company expected to face considerable challenges in its commercial recovery.

American Airlines has long been seen as a catch-up story in the airline industry, given its later merger that hindered its pace compared to legacy peers, its younger and more simplified fleet post-COVID, and its lucrative yet under-market credit card deals with banks.

While a catch-up event may still be on the horizon, the current obstacles facing AAL are cause for concern in supporting a long-term investment case.

One of the significant issues is the commercial missteps expected to inhibit AAL's participation in the second half pricing up cycle. AAL's new "modern retailing" system, aimed at more direct distribution of fares, resulted in a reduction in sales staff and upset travel agents and corporate clients, driving them towards competitors.

While hiring back sales staff can be done swiftly, repairing damaged customer relationships could be a more complex challenge, potentially requiring significant financial investment.

In addition to these concerns, an agreement with flight attendants is likely to generate additional costs, slowing the pace of future earnings growth. Furthermore, AAL has been losing share in high-value business markets due to an unwinding partnership, adding to the headwinds.

The pressure on earnings has reignited debates about AAL's higher debt load, most of which is asset-backed due to its younger fleet. While this argument has been somewhat accepted in the past two years as earnings improved, debt remains a concern especially when numbers are being cut and AAL lags in commercial execution.

Given the airline's leverage and concerns about industry capacity, Bernstein suggests there are better risk-taking opportunities in the airline industry than American Airlines at present.

Bernstein downgraded its rating for American Airlines from Outperform to Market-Perform, and a reduction in the price target from $18 to $12.