10-Year Citi Partnership And Fleet Expansion Will Strengthen Future Prospects

Key Takeaways

• Long-term agreements and strategic debt reduction improve financial stability, potentially stabilizing net margins through reduced interest expenses.
  
• New partnerships and customer experience investments aim to drive incremental revenue, enhancing earnings and loyalty-related revenues.
  
• Operational challenges, high costs, substantial debt, supply chain issues, and competitive pressures could hinder American Airlines' revenue growth and profitability.

Catalysts

Through its subsidiaries, operates as a network air carrier in the United States, Latin America, Atlantic, and Pacific.

• American Airlines has secured multiyear agreements with its largest work groups, providing labor cost certainty through 2027 and potentially stabilizing net margins.
  
• The new 10-year partnership with Citi to become the exclusive issuer of the AAdvantage co-branded credit card is expected to drive significant incremental revenue and enhance earnings.
  
• Continued investments in the customer experience, including the introduction of new premium cabin products and lounges, aim to increase premium and loyalty-related revenues.
  
• The airline plans to expand its long-haul fleet significantly by 2029, which may enhance revenue opportunities from international routes.
  
• Strategic debt reduction efforts have lowered the total debt by more than $15 billion since mid-2021, which could positively impact net margin and earnings by reducing interest expenses.

American Airlines Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Airlines Group's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $3.22) by about March 2028, up from $846.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.8 billion in earnings, and the most bearish expecting $2.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.1x on those 2028 earnings, down from 8.6x today. This future PE is lower than the current PE for the US Airlines industry at 10.8x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

American Airlines Group Future Earnings Per Share Growth

Risks

• American Airlines faces operational challenges, like capacity constraints in certain regions and recovery efforts from prior strategic missteps, which may limit revenue growth, impacting future earnings potential.
  
• Elevated non-fuel unit costs, partly driven by new labor agreements and regional capacity growth, could pressure net margins if revenue growth does not sufficiently offset these increased expenses.
  
• The company has substantial debt levels, despite recent reductions, which could constrain financial flexibility and increase interest expenses, negatively impacting net margins and earnings.
  
• External factors such as supply chain issues affecting aircraft delivery and potential disruptions from space launches could impact operational efficiency and flight schedules, leading to increased costs and affecting revenue and overall profitability.
  
• The airline faces competitive pressures in recovering corporate and premium passenger market share, which could impact its ability to grow revenue and sustain pricing power in key markets.

Valuation

• The analysts have a consensus price target of $18.504 for American Airlines Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $12.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $62.4 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 11.4%.
• Given the current share price of $11.07, the analyst price target of $18.5 is 40.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.