Southwest Airlines vs. American Airlines: Which is the better investment?

Airline stocks have been severely affected by the coronavirus outbreak, with the crisis causing heavy revenue loss to the companies. But, with the situation improving in key markets, thanks to the vaccine launch, some of the aviation companies are showing signs of recovery.

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Airline industry has miles to go to return to pre-COVID levels

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The aviation business involves multiple industrial activities to facilitate seamless transportation of passengers and cargo, and it significantly influences the country’s economy. So, the sharp fall in passenger traffic during the pandemic affected overall economic activity, due to the widespread travel restrictions and job losses. However, a few of the carriers witnessed a pick up in traffic in recent months though their stocks remained affected, in general. It is estimated that in 2021, the recovery will get a boost from the incentives announced by the government.

Southwest Airlines

The fourth-quarter performance of Southwest Airlines Co. (NYSE: LUV) was not up to the mark as it posted a loss of $1.29 per share, compared to profit last year. Revenues plunged 64% to about $2 billion. But the results were better than the outcome the market had projected.

Also, the stock picked up strength after faltering in the early months of the pandemic, and the performance has been better than that of Southwest’s peers. Moreover, analysts expect the recent improvement to continue, giving fresh hopes to prospective investors. The Airline maintained stable cash flow in recent quarters, which will enable it to pay off debt more effectively. The company has a debt of $12.6 billion, which is considered sustainable and is better than that of American Airlines and Delta Airlines.

American Airlines

American Airlines (NASDAQ: AAL), which is considered the largest airline in terms of fleet size, reported a net loss in each of the last four quarters. The loss narrowed sequentially in the most recent quarters and beat the market’s expectations, in a sign that things are changing for the better for the airline. However, it seems the improvement didn’t impress the market as the stock maintained the downtrend throughout fiscal 2020, except for a modest rise. The stock has lost about 36% since last year, though it regained a part of the lost strength last month after the management announced plans to restore more than half of the domestic capacity by mid-2021.

On the positive side, the stock looks relatively cheap at the current price levels, compared to the company’s competitors. Airlines stocks typically bounce back after falling, as the industry is influenced by macroeconomic changes. American Airlines would be a good long-term bet, given the recovery the airline industry is witnessing, but it might disappoint those looking for short-term engagement.

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Read management/analysts’ comments on quarterly reports

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Currently, American Airlines is looking to expand capacity before the upcoming summer season, without losing focus on its customer-centric approach. As part of expanding its international reach, the company recently announced the West Coast International alliance with Alaska Airlines.

Which Stock to Buy?

Both American and Southwest are going through one of their worst phases, with the pandemic causing as much as 95% fall in revenues last year, and the companies have a long way to go before returning to the pre-COVID levels. But, better recovery prospects, lower debt, and stronger cash position, combined with improving stock performance, make Southwest a better investment option.