AAL Benefits From Improved Air-Travel Demand Amid High Costs

Improving air-travel demand is aiding American Airlines AAL. High labor costs and escalated debt load is however, hurting the airline.

Factors Favoring AAL

We are impressed by the gradual improvement in air travel demand, which should aid passenger revenues, the largest component of the carrier’s top line. Our estimate for first-quarter 2026 passenger revenues indicates 8.5% growth from first-quarter 2025 actuals. Driven by high passenger revenues, AAL expects the metric in the March quarter to improve 7-10% from year-ago actuals. Our estimate for first-quarter 2026 total revenues indicates 8.4% growth from first-quarter 2025 actuals.

American Airlines is constantly looking to add routes and broaden its network. The company aims to add 15 new routes to its network for the summer of 2026. This will boost connectivity across the United States. Its network already provides more one-stop connections than any other airline. As part of this expansion strategy, AAL will offer more than 500 daily departures from Chicago next summer. 

The use of AI and data analytics is a positive for American Airlines. The company has been aggressively upgrading its technology focus with AI-driven systems to modernize both customer experience and operational efficiency as part of a broader digital transformation. The airline leverages machine learning and predictive analytics across numerous functions, from AI-powered rebooking to customer-friendly generative search tools. Through these efforts, the airline aims to optimize revenue management and further improve customer experiences. 

American Airlines Price

American Airlines Group Inc. price | American Airlines Group Inc. Quote

Key Risks

Increased labor costs, a result of the deal inked with pilots last year, are hurting American Airlines’ bottom line. Moreover, since trade unionism is quite robust in this industry, it is hard to keep a check on wage increases. Salaries, wages and benefits have increased 9.9% in 2024 and 4.6% in 2025. Non-fuel unit costs are expected to increase 3-5% year over year in the first quarter of 2026.

AAL's financial metrics indicate that its leverage is elevated and a massive negative for shareholders. The long-term debt burden of the company stood at $25.2 billion at the end of 2025, which translates into a debt-to-capitalization of 94.9%. The figure is above the Zacks Transportation – Airline industry’s 54.2%.

Zacks Rank

American Airlines currently carries a Zacks Rank #3 (Hold).

Airline Stocks to Consider

Investors interested in the airline industry may consider Allegiant Travel Company ALGT and Southwest Airlines LUV.

ALGT currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allegiant has an expected earnings growth rate of more than 100% for the current year.  The company has an encouraging earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters and met the mark once, delivering an average beat of 23.6%.

Southwest Airlines currently flaunts a Zacks Rank #1.

LUV has an expected earnings growth rate of more than 100% for the current year. The company has an encouraging earnings surprise history. Its earnings topped the Zacks Consensus Estimate in three of the trailing four quarters and missed the mark once, delivering an average beat of 253.9%.

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This article originally published on Zacks Investment Research (zacks.com).

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