Fleet Renewal And Cost Savings Will Drive Future Efficiency

Key Takeaways

• Fleet renewal and strategic debt management enhance financial flexibility, positively impacting earnings and capital expenditures.
  
• Cost management, revenue growth from loyalty programs, and strong international travel demand improve margins and boost revenue.
  
• Economic uncertainty and rising costs are straining American Airlines' revenue and margins, while competition and potential tariffs pose additional risks to financial stability.

Catalysts

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

• American Airlines has completed its fleet renewal during a favorable economic environment with lower aircraft costs and lease rates, leading to low aircraft CapEx requirements for the remainder of the decade. This financial flexibility can positively impact earnings by reducing future capital expenditures.
  
• The company's best-in-class cost management and business reengineering efforts are expected to result in over $750 million of cumulative cost savings by the end of 2025. This contributes to improving net margins through enhanced operational efficiencies.
  
• American Airlines is strengthening its partnership with Citi and growing its AAdvantage loyalty program, with loyalty revenues up 5% year-over-year. This focus on revenue potential through loyalty programs is likely to enhance long-term revenue growth.
  
• The international RASM (Revenue per Available Seat Mile) has shown strength, with significant year-over-year increases in the Atlantic and Pacific regions. American expects strong demand for international travel, particularly yields in premium cabins, which is likely to drive revenue growth.
  
• American Airlines is strategically managing debt and improving its balance sheet, reducing total debt by $1.2 billion in the first quarter and refinancing significant debt at lower interest rates. The focus on free cash flow and debt reduction is expected to enhance earnings per share as financial obligations decrease over time.

American Airlines Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Airlines Group's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $2.91) by about May 2028, up from $685.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.6 billion in earnings, and the most bearish expecting $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, down from 9.5x today. This future PE is lower than the current PE for the US Airlines industry at 8.5x.
• Analysts expect the number of shares outstanding to grow by 0.52% 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

• Economic uncertainty has pressured demand for air travel, leading to a negative impact on American Airlines' first quarter results and second quarter outlook, which could affect revenue and net margins.
  
• Escalating competition and reduced consumer discretionary spending in the domestic market have caused domestic passenger revenue per available seat mile (RASM) to decrease, which may further strain revenues and earnings.
  
• Rising non-fuel unit costs driven by new collective bargaining agreements have increased expenses, potentially affecting net margins despite cost-saving initiatives.
  
• The macroeconomic environment's continued uncertainty has caused American Airlines to withdraw its full-year outlook, suggesting potential risks to future earnings and financial stability.
  
• Future tariff implications on aircraft, with American Airlines having planned deliveries from European manufacturers, could increase costs and impact net margins and capital expenditures.

Valuation

• The analysts have a consensus price target of $13.365 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 $24.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $61.6 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $9.9, the analyst price target of $13.37 is 25.9% 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.