Rising Costs And Declining Demand Will Undermine Profitability

Key Takeaways

• Increasing regulatory, labor, and sustainability pressures are driving up costs and limiting margin flexibility despite ongoing investments in fleet and premium offerings.
  
• Structural declines in business travel and shifting demographics threaten long-term revenue growth and hinder the effectiveness of premium and expansion strategies.
  
• Expansion of premium offerings, targeted investments, strong loyalty program growth, and fleet modernization position the company for higher margins, operational efficiency, and sustained revenue growth.

Catalysts

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

• Escalating regulatory pressures around climate change are poised to materially increase American Airlines' compliance costs through new carbon taxes, emission limits, and costly mandatory upgrades to its fleet, directly eroding operating margins over time as environmental legislation tightens globally.
  
• The structural reduction in business travel from advanced remote work technologies and normalization of virtual meetings threatens to cap or shrink American's core revenue segments long term, significantly depressing future revenue and limiting the effectiveness of efforts to grow premium and corporate travel earnings.
  
• Substantial capital expenditures will persist for fleet modernization, as American's delivery schedule for new aircraft remains high for the rest of the decade; this ongoing spending will suppress free cash flow and constrain the company's ability to improve its heavily leveraged balance sheet, raising the risk of earnings pressure if demand falters.
  
• Persistent labor cost inflation from industry-leading collective bargaining agreements will continue to elevate American's cost structure above competitors, squeezing net margins and reducing flexibility to compete on price if faced with increased competition or demand shocks.
  
• Demographic shifts in developed markets, alongside growing sustainability concerns from younger travelers, may cause a long-run stagnation or decline in overall air travel demand, directly threatening American's top-line growth and undermining the anticipated benefits from premium product investments and route expansions.

American Airlines Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on American Airlines Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming American Airlines Group's revenue will grow by 4.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.3% today to 1.9% in 3 years time.
• The bearish analysts expect earnings to reach $1.2 billion (and earnings per share of $1.76) by about July 2028, up from $685.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.3x on those 2028 earnings, down from 11.0x today. This future PE is lower than the current PE for the US Airlines industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

American Airlines Group Future Earnings Per Share Growth

Risks

• The ongoing strength and expansion of American's premium cabins, coupled with resilient premium demand and continued investment in premium seating and lounges, are likely to drive higher yield per passenger and support margin growth over time, directly benefiting top-line revenue and net income.
  
• Recovery and sequential improvement in domestic demand, alongside strong international traffic and the company's strategic hub locations in the fastest-growing metro areas, increase the likelihood of long-term passenger growth and robust revenue expansion.
  
• Effective investments in technology, customer experience enhancements (such as new lounges, touchless ID, and satellite WiFi), and successful cost control initiatives point to greater operational efficiency, which can lower unit costs and support improvements in net margins and free cash flow.
  
• The AAdvantage loyalty program, which is growing its member base rapidly and generating higher yield from engaged users, alongside the 10-year Citi partnership, is positioned to drive recurring, high-margin revenues and could positively impact recurring earnings and cash flow.
  
• American's ongoing fleet modernization-reflected in accelerated new aircraft deliveries and a moderate capital expenditure trajectory-supports lower long-term fuel and maintenance costs, which are likely to enhance operating margins and long-run earnings potential.

Valuation

• The assumed bearish price target for American Airlines Group is $8.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of American Airlines Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $61.2 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 6.3x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $11.46, the bearish analyst price target of $8.0 is 43.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.