American Airlines Group Inc. (NASDAQ:AAL) is offering winter getaway packages to destinations like Cancun and Miami starting around $300. Such deals aren’t the only thing people are warming up to at the airline. 

Shares of the world’s second largest airline by revenue have ascended 30% off their October 27th low. This makes American a top quintile S&P 500 performer during the stretch and one to watch in 2024 — especially if economic conditions strengthen.

The passenger airline industry sure has a lot of ground to make up. After winning over traders as a post-pandemic reopening play, American, Delta, Southwest and United shareholders have mostly deplaned. Since March 2021, the Amex Airline Index is down more than 40%. Signs of a slowdown in once booming travel demand and higher fuel and labor costs caused Wall Street to lower their earnings estimates in the fourth quarter of 2023.

Heading into 2024 though, the skies are clearing. The International Air Transport Association (IATA) recently forecast that the global airline industry will generate record operating profits of $49.3 billion this year. With cost inflation expected to moderate, fares expected to remain high and passenger traffic expected to rebound, airlines may be gearing up for a return to growth.      

With a 17% share of the U.S. market, American Airlines could be one of the biggest beneficiaries. Stronger quarterly financial performances would no doubt restore interest in a stock that has the lowest share price and is the most volatile of the four S&P 500 airlines. This could lead to outsized percentage gains if the group finally takes off.

Here are four more reasons AAL could find smoother air in 2024.

#1 - AAL just got a rare upgrade

This week, Morgan Stanley upgraded American Airlines from Equal Weight to Overweight. The timing was curious considering aerospace stocks have been getting hit in 2024 in the aftermath of the Alaska Airlines incident that grounded Boeing 737 Max 9’s. Fortunately for American, its fleet doesn’t include any of these planes. Along with expectations of a solid holiday travel season, this has the firm comfortable enough to predict that AAL can appreciate to $20 by year end. Based on Wednesday’s closing price, this equates to 40% upside.

Morgan Stanley’s bullish call marks the first time since March 2023 that AAL was upgraded. Only this time is different. Wolfe Research’s upgrade back then was from Underperform to Peer Perform. The Morgan Stanley call is worth noting because the analyst there has a good track record with the stock — in contrast to less profitable calls made around Delta and Southwest. 

#2 - Website traffic is trending higher

Global website traffic for aa.com spiked to 64.1 million in October. For all of Q4 of last year, web visits were 185.2 million, more than 50% above where they were in Q4 of 2022. This supports Morgan Stanley's notion that travelers were unusually active this holiday season and that it could translate to a strong Q4 financial report to jump-start the year. American Airlines is expected to announce Q4 results and provide an updated 2024 outlook later this month.

#3 - Room for P/E multiple expansion

AAL is trading at 6.2x, trailing 12 months earnings. Its three S&P 500 peers — Delta, United and Southwest — have an average trailing P/E ratio of 17x. While Southwest is an extreme outlier at 38x, the distance from the group average suggests there is significant room for P/E multiple expansion. 

An expansion to 17x is unreasonable, but AAL deserves to trade in-line with Delta because of its similar size and growth prospects. An expansion to Delta’s 7.9x P/E equates to 27% price appreciation. A realistic stretch to 8.7x would give AAL 40% worth of legroom.

#4 - Short covering could accelerate gains

Approximately 10% of AAL’s float is held short. This means that roughly 63 million of the shares available for public trading are controlled by bears betting against the stock. This percentage has been higher in the past but still holds the potential for short covering should AAL continue to gain altitude. 

One thing that could help in this regard is a crossover of the 50-day and 200-day moving averages. These lines are starting to converge and a high volume breakout could cause panic to set in among shorts — and buying pressure to accelerate.