American Airlines Faces Multiple Challenges Amid Rising Valuation Concerns

American Airlines has struggled since 2018 due to low revenue growth, narrowing or stagnant margins, and high debt. The recent earnings report does not suggest a turnaround. The airline faces multiple challenges, but its valuation has increased.

American Airlines (NASDAQ:AAL) has been grappling with significant challenges since 2018, with low revenue growth, narrowing or stagnant margins, and high debt levels. The recent earnings report did not provide any indications of a turnaround, leaving investors concerned about the airline's future prospects.

One of the primary growth challenges for American Airlines is its high cost structure, which has led to multiple downward revisions for earnings expectations. The current analyst estimate for 2025 EPS of $0.44 was lowered by over 50% from $1.00 just three months ago [1]. American Airlines is projecting EPS for 2025 to be anywhere from a negative $0.20 to a positive $0.80, reflecting the uncertainty surrounding its financial outlook.

The company's revenue growth is expected to be minimal, with a projected increase of only 0.53% in 2025. This is due to high cost structures, particularly in labor and fuel costs, which have led to a decline in gross, operating, and net income margins. For instance, the gross margin fell from 27.7% in Q2 2024 to 27.12% in Q2 2025, while the net income margin declined from 5% to 4.16% over the same period [1].

Despite these challenges, American Airlines has seen growth in premium seats, with Atlantic PRASM increasing by 5% in Q2 2025. However, this growth has been offset by weakness in domestic leisure demand, which decreased by 6% in the same period [1]. This dependency on premium demand raises concerns about the airline's ability to fill all premium seats as it increases capacity.

American Airlines' balance sheet also presents concerns. The company has $8.6 billion in cash and short-term investments and $37.2 billion in total debt, resulting in a net debt of $28.6 billion. Additionally, there are 1.7 times more current liabilities than current assets and 1.06 times more total liabilities than total assets, with negative total equity of $3.9 billion [1]. These factors suggest that American Airlines could face financial distress if it experiences a significant loss of revenue or large net losses.

Valuation-wise, American Airlines is trading with a forward PE of 25.3x, which is higher than the sector median of 21. Delta Air Lines (DAL) and United Airlines (UAL) have forward PEs of 9.7x and 8.9x, respectively [1]. This higher valuation may deter investors, who may prefer stocks with better growth outlooks and valuations.

Technically, American Airlines' stock has been trading in a range below $9 up to about $20 over the past couple of years, with the RSI and MACD indicators suggesting a bearish trend [1]. The recent earnings report did not provide a significant catalyst for the stock, and the next earnings report scheduled for October 22, 2025, could either provide a positive or negative catalyst depending on the company's performance.

In conclusion, American Airlines faces multiple challenges, including high costs, low revenue growth, and a high debt load. While its valuation has increased, the company's financial outlook remains uncertain, and investors may prefer to look elsewhere for better investment opportunities.

References:
[1] https://seekingalpha.com/article/4806331-american-airlines-multiple-challenges-and-a-higher-valuation