American Airlines (AAL) Improves in Q1, but the Buy Case Is Still Missing

American Airlines (AAL) is showing improving operational trends, with first-quarter results pointing to a stronger core business, though not yet compelling enough to justify a bullish stance. The earnings call on April 23 reflected solid revenue growth, resilient pricing, and early gains in unit economics, even as higher fuel costs and a cut to full-year guidance weighed on headline performance. This suggests that the airline’s early-stage turnaround plan is beginning to take shape.

At the same time, the balance sheet remains stretched, and with management ruling out any mergers and acquisitions (M&A) — despite recent speculation involving United Airlines (UAL) — the sector’s inherent sensitivity to macro swings continues to limit conviction, especially in a mid-cycle environment.

Overall, I view American as a story that has improved but still does not stand out relative to its peers, which supports my Hold rating on the stock.

The Profitability Gap behind the Turnaround

After years of underperformance versus the Big 3 legacy U.S. carriers, American Airlines set 2026 as its turnaround year. Rewinding a bit, American’s revenue passenger miles in 2025 came in at 250.3 million — roughly in between United’s 271.6 million and Delta’s (DAL) 249.6 million. Yet despite that comparable scale, the company was a clear laggard in turning those numbers into profitability.

With a net margin of just 0.2% in FY25, compared to 7.9% and 5.7% for Delta and United, respectively, American significantly lagged its peers on profitability. As a result, it ended the year with only $111 million in net income, versus $5 billion for Delta and $3.3 billion for United.

CEO Robert Isom’s turnaround plan, however, doesn’t follow the typical playbook of simply cutting costs to expand margins. Instead, it’s a broader strategic repositioning, aimed at shifting American from a model overly focused on domestic volume and low margins toward a more premium airline. The goal is to drive higher revenue per passenger, attract higher-quality demand, and deliver more consistent operational execution.

Early Signs the Turnaround Is Working

Q1 offered the first real glimpse of this turnaround plan, with some improvements already coming through. Passenger Revenue per Seat Mile (PRASM) rose 6.5% year-over-year, indicating very resilient demand and pricing power, demonstrating effectiveness. Premium outperformed, already showing an improvement in the mix, while corporate revenue jumped 13%, also in line with the turnaround plan’s objectives.

Overall, revenue increased 10.8% year-over-year despite weather-related impacts and fuel headwinds of $320 million and $400 million, respectively, yet still delivered a pre-tax margin improvement of 2 percentage points year-over-year.

Finally, and perhaps most importantly, Cost per Available Seat Mile excluding fuel (CASM-ex) grew 5.2%, which is still below PRASM growth. This implies a per-unit margin spread of about 2.6 cents, suggesting that core unit economics remain solid.

The caveat is that this spread is a meaningful step down from the 3.31-cent peak in Q2 2025. That being said, part of this compression seems more timing-related than structural, as Q1 weather disruptions and fuel volatility likely distorted network optimization to some extent.

Debt Is Coming Down, but Risk Remains

American Airlines’ balance sheet is meaningfully riskier than that of its legacy peers, which is why deleveraging remains a central pillar of the bullish thesis. Q1, however, showed some encouraging progress on that front.

The company reported total debt of $34.7 billion, down $1.8 billion from the previous quarter and at its lowest level since 2015. This is important, as it already puts American Airlines in line with its stated goal of keeping debt below $35 billion. Looking back to the COVID-19 peak in 2021, when debt reached roughly $54 billion, this implies that about $20 billion in deleveraging has already been achieved over the past few years.

That being said, the balance sheet is still stretched. The company’s debt-to-equity ratio stands at 54% over the last 12 months, well above Delta’s 17% and United’s 35%. Even so, the $10.8 billion in liquidity reported in Q1 suggests this is no longer a story of immediate balance sheet stress.

Fuel Is Testing the Turnaround, Not Breaking It

However, for deleveraging to be sustainable, profitability needs to improve. This is where the near-term outlook remains challenging, largely due to fuel costs. Management has made it clear that it intends to offset this pressure through pricing and capacity discipline. For Q2, the expectation is to recapture about 40%–50% of the incremental fuel costs through revenue, rising to 75%–85% in Q3 and potentially approaching 90% in Q4, assuming demand remains solid.

In the meantime, the near-term setup is still tough. The company is now working with a fuel price of around $4 per gallon for Q2 and acknowledges that, for the full year, the impact could exceed $4 billion in additional costs.

As a result, FY26 earnings per share (EPS) guidance was revised down from a range of $1.7–$2.7 to -$0.4–$1.1. Counterintuitively, the market reaction was relatively constructive. Even with a potential $4 billion fuel headwind, the quarter still showed strong demand, double-digit revenue growth, and resilient unit economics. In other words, the core business is improving, even in a quarter that had plenty working against it.

On top of that, management laid out a clear path to recapture margins throughout FY26, rather than see them deteriorate.

Is AAL a Buy, According to Wall Street Analysts?

There’s a clear divide between bulls and skeptics when it comes to the consensus on American Airlines shares among Wall Street analysts. Of the 15 ratings issued over the past three months, seven are Buy, seven are Hold, and just one is Sell. The average price target stands at $15.33, implying an upside of about 26.72% from current levels.

Early Progress, but the Risk-Reward Remains Balanced

American Airlines reported a Q1 that was “less bad” than expected. While the impact of fuel costs was significant for the full-year bottom-line guidance and does put some pressure on the ongoing deleveraging plan, there were still clear improvements in revenue and per-unit margins.

Even so, we are arguably in a mid-cycle macro environment. In this context, the inherently volatile nature of the airline sector tends to hit companies without a fortress-like balance sheet, like American, harder. As a result, with still relatively thin margins, American Airlines remains more sensitive to downturns, such as the recent one driven by higher fuel prices.

For this reason, I remain skeptical of the thesis that American Airlines can outperform its sector peers. At the same time, I recognize that this was not a bad quarter given the circumstances, and therefore I maintain a Hold rating on AAL.