The airline just announced it’s investing $200 million in the biggest Brazilian carrier, but should you buy shares in American Airlines?
Sept. 20, 2021
The airline industry has had a tremendously difficult year but things are slowly starting to look up as people take to the skies to travel again. American Airlines stock is up over 3% in the last five days and have jumped 30% year-to-date.
The return to vacationing is not what’s moving American Airlines (NASDAQ: AAL) stock right now though. Instead, news that the popular carrier is extending its partnership with top Brazilian airline, Gol Deepen, has investors excited.
Why are American Airlines shares up?
American Airlines has made a big investment in an important market. Last week, the airline unveiled its plans to invest $200 million into Gol, the largest domestic airline in Brazil. This will increase American Airlines’ stake in the Brazilian business up to 5.2%.
In addition, the two companies stated their intention to deepen their business ties by way of an exclusive codeshare agreement. Is this good news for the company as a long-term investment though?
This move is a sign that American Airlines wants to expand its footprint in the country. Currently, the company has the biggest U.S. presence in South America due to its Miami hub, which makes access to the region easier.
In 2013, when American Airlines merged with US Airways, it serviced niche destinations in Brazil and investors expected the company to continue to increase the number of these routes. Since then, Brazil’s economy has struggled as they have battled recessions and their currency losing value. Both of these factors have decreased the amount of cash Brazilians have had to spend on outbound tourism, which has made flying to the country unprofitable for U.S. airlines.
On top of the other struggles, the pandemic resulted in the airline cutting back on all flights except those to its two major cities, Sao Paulo and Rio de Janeiro. Collaborating with a Brazilian airline means that it can cover more of this market by connecting flights from smaller areas to the two major routes in the bigger cities, which will help to fill more seats to the U.S.
This new agreement was confirmed last week and will give American Airlines customers access to 20 new destinations in South America. The deal also makes American Airlines and Gol exclusive codeshare partners in their own markets for at least three years.
The two businesses will also offer a joint loyalty program that gives flyers more ways to earn miles, and benefits such as priority boarding, lounge access, and seat selection. American Airlines will also take a seat on Gol’s board.
Is the Gol deal good for American Airlines?
American Airlines has a lot of debt but the deal might boost income by helping the company build its footprint a new market. The company has already proved that it performs well in this market too. In Q4, American Airlines brought in $466 million in revenue from Latin American, which was down over 61% from the year-ago period due to the pandemic. In Q2 of this year, sales improved to $936 million from the region showing signs of recovery as people return to travel.
This deal might just be what the company needs to recover post-pandemic and investors will be hoping for a big increase in sales from the region in its next earnings release. Expanding its market reach is always good for a company, but this market will be hard to crack especially as it is still battling with the worst effects of COVID-19.
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