12:23 PM EDT, 06/03/2024 (MT Newswires) -- American Airlines Group ( AAL ) was viewed optimistically a month ago but has faced setbacks with a significant Q2 guidance cut and management changes, and must demonstrate tangible improvements, Morgan Stanley said in a note Monday.

"The key debate here is whether the business is structurally challenged or if management recognized that a change of direction was needed and will be able to implement the pivot relatively quickly," the note added.

The firm said American Airlines' ( AAL ) current challenges stem partly from broader industry issues, but also from specific strategic choices, such as pushing for direct distribution, prioritizing cost leadership over revenue and ceding route share to competitors.

"While this may have been the right approach in the long-term, in the short term American Airlines ( AAL ) ended up holding the bag with the worst of both worlds, rather than the best of both worlds," Morgan Stanley said.

The firm expects that the company can get relatively quick results by adjusting to seasonal demand, reducing capacity in Q3 and Q4 to improve revenue, and reversing distribution decisions to re-engage travel agents. However, building back hub traffic and corporate share gains will take time.

Morgan Stanley said American Airlines ( AAL ) is poised to benefit from domestic travel's premiumization and increased demand, with pricing power potentially boosting its position over struggling competitors.

The firm reduced the price target on the company's stock to $18 from $20 and reiterated its overweight rating.

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