Why American Airlines Stock Suffers, According To Its CEO

At the American Airlines ‘State of the Airline’ meeting with employees following Thursday’s earnings call, CEO Doug Parker explained why he believes American’s shares have performed horrendously.

I think [the American Airlines stock] is undervalued. I generally think that. I think that more than usual. But don’t use that as personal investment advice, you should make your own decisions.

The reason I think we’ve gotten ourselves undervalued. When I say undervalued what I mean by that is the stock is selling for less than I believe it’s worth. We’ve gotten ourselves in that position because we’ve underperformed. That’s what happens.

Often the stock market cares about momentum. And much of those who buy and sell stocks care as much about trends as they care about absolute value. While I may believe it’s selling for a lot less than it’s worth, what I know is that when we go run a summer like we ran our stock will fall. It doesn’t just affect our team and our customers it affects our shareholders…that’s why in the last month or two it has fallen more than others have fallen.

And the good news is when -we shift our momentum, and we start doing all the things that I told you we intend to do it should indeed increase. But it’s not going to do it because we say those things are going to happen. It’s going to do it because we go do those things. And that’s what we need to do.

The stock follows performance, it doesn’t project performance as much as we’d like it to. We need to go produce. I’m really excited about our ability to go do that. And I suspect when we do you will see our stock respond accordingly.

airline stocks
Copyright: rido / 123RF Stock Photo

American has been attributing its troubles to the grounding of the Boeing 737 MAX and to a work slowdown by mechanics. However the airline’s poor stock performance predates both of those things. Shares peaked in January 2018. Moreover the big summer slide in share price didn’t come until mid-July, long after mechanics (and management failures) hampered the airline’s performance.

Regardless, Doug Parker’s theory of the stock market is intriguing:

  1. He’s a momentum investor
  2. He believes the market is backward-looking

I’m not certain those two things are entirely consistent with each other. There’s significant academic research in support of momentum as a factor in pricing stocks. However aside from expectations of the future being formed by past performance it’s hardly a majority view than share prices reflect past performance rather than likely future performance. Here’s a more plausible theory that explains pricing movements of airline stocks.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Or he is incapable of allocating capital, cannot articulate any sort of mission for the airline and is totally full of crap/in denial about his investment thesis of momentum investing while being backward looking????.
    He’s good otherwise.

  2. Reading this BS certainly causes one to wonder if investor relations and media relations has been relegated to a college intern at AA. Who actually writes this manure; who is expected to buy into it?

    A visitor from outer space could clearly see how AA continues to tank for lack of direction; an inferior market position; no strategic plan; a demoralized workforce who knows this.

    In summary, “if it flies like a duck and quacks like a duck, it’s a duck!” It all points to a failed management that created the workforce issues to complement the inferior cabins. “Ossis” today is code for Guantanamo. I doubt that even Aeroflot in its monopoly position is jealous of AA.

    The more Parker pontificates from his perch, the more he indicts himself and his management team lost in space.

  3. His choice of words may be bad, but his “backward looking” comment isn’t all wrong. It’s clear that investors use past performance to predict the future. In this case, American’s terrible recent performance has led investors to expect it to continue in some fashion and hence, a lower stock price. Best broad example: The frequent significant responses for stocks in general when quarterly earnings exceed or miss estimates. That’s clearly using past performance to inform forecasts of the future

  4. One reason a stock may not do well in terms of price is a lack of confidence in management. Investors have seen a lack of performance by Parker and Co. despite a solid economy and decent fuel prices. Have they performed as well as Southwest, Delta, etc. over the last 5 years? That is what investors are looking at.

    I don’t think they have presented any kind of plan that many feel confidence in.

    AA has potential but need leadership to solve a number of problems including contracts with its employees. Finding excuses constantly for someone’s problems is not something I want to see in leadership.

  5. Reading this as I’m sitting in DFW waiting for a flight after missing a connection caused purely by stupidity. Having a 737 taxi the longest way possible to an RJ gate then eventually to a D gate only to have to wait for another plane then eventually be towed in caused me and my companion to miss our flight by 3 minutes. Even though that door was closed, that flight endd up leaving over 20 minutes late as well.

    They need to get operationally sound (and fire the C-Suite) then the stock can recover. In fact, I’d say that by firing the CEO that would probably make the stock jump a good 10% overnight if not more.

  6. Doug is a USELESS ceo of such large american airline, this company’s stock trails behind United Delta Southwest that shows this man should be in this position.

    Board of directors, please take a note and fire this incapable person from this company.

    I talk to employees of AAL , they all hate working for AA & they curse Doug Parker for huge failures.

    There are many better people to do it, such as Meg Whitman

  7. Management that is clueless as to what equates to good performance is one reason. Poor performance of their crew, attendants and flights is another. Inability to accept responsibility for their part in the mechanic walkout. Planes that have truly become sardine cans with everyone crammed cheek to jowl, which in itself causes multiple stress related incidents. Need I go on?

  8. “ He believes the market is backward-looking”

    – That’s 50% correct. The other 50% is always based on growth potential (and market conditions, to a degree). You can be one of the most profitable companies (*cough* Apple) but if your growth stalls, investors pause.

    – For the most part, Doug’s comments are absolutely correct. He just leaves out the poor decision-making and strategy that his team refuses to find fault in.

    Results are what they are, and the stock price reflects that.

    Wait. I can’t believe I partially agree with Doug, for once. I need a drink.

  9. The sad part is the entire AA management team can’t or won’t realize that passenger experience helps to drive revenue premium in conjunction with D0. You can perform perfectly when it comes to D0 but if the onboard experience is subpar , then discretionary travelers are going to go elsewhere . The best example being DL – they are incredibly reliable and offer a great onboard experience thus they enjoy an industry leading revenue premium.

    I am a J class traveler for both domestic and international . My business has moved almost exclusively to DL . In 2019 , as a Diamond Medallion , I have not once had to claim bonus miles for their baggage delivery 20 minute guarantee. My bags are tagged priority and come off first . All my flights except for the occasional MD88/90 (no rj or 717 flights this year ) have in seat entertainment. The meals are of very decent quality .
    My couple of AA flights – told at Miami they have 1 hour to deliver bags after 45 minutes waiting – 2 hour 738 flight – not widebody . Priority tags mean nothing – come out last . One no PDB – one just water despite both having arrived and boarded early . One 738 with in flight screens but had to ask for headsets which seemed to annoy FA. I will say the J class on the 738 with screens was quite nice and comfortable- sorry to see them get reconfigured . Also not going to play 772 roulette at AA and risk the rocking seats .

    So for me – reliability certainly matters BUT if I can get reliability coupled with an elevated passenger experience , then that is where my money goes .

  10. Unless you’re Brett Snyder (re)using the “Godzilla’s home” map of Tokyo every time you talk about Tokyo, it’s probably best not to link to a 3 year old article that uses the same stock market graphic that you reused in the article that has the link. Godzilla’s home is cute and never gets old. This on the other hand…

  11. I think Parker’s theory — which is basically momentum based on recent results — is
    A LOT better explanation for that sad 2016 theory you linked (like “nobody” worries that much about RASM these days). The reality of course is that individual stock picking is incredibly difficult: the vast majority of investors fail at it. Airline investing is even harder: one of the worst “crashes” for USA airline stocks in recent years was the initial passage of Brexit by the UK! Pure idiocy, but idiocy often controls airline stock pricing. I would note that AA stock is currently showing a lot of life, probably due to the recent realization that the stock is trading at only a few times its 2021 free cash flow (the fact that the airline is currently running an excellent operation isn’t hurting). But will this trend continue? Candidly, no one knows. You can try to bet on theories, but the risks are huge (as are the potential rewards).

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