New Citi Partnership And Fleet Expansion Will Boost Customer Experience And Demand

Key Takeaways

• New contracts and partnerships improve cost certainty and revenue, boosting margins and profitability.
  
• Enhancements in fleet and services, alongside strategic agreements, aim to increase revenue through better customer experience and channel growth.
  
• Economic uncertainties and rising operational costs could pressure profitability and hinder revenue growth, with strategic execution risks potentially affecting projected financial targets.

Catalysts

Through its subsidiaries, operates as a network air carrier.

• The new multiyear contract extensions with American Airlines' largest workgroups provide labor cost certainty through 2027, allowing the company to better predict and manage its expenses, thus potentially improving net margins.
  
• The 10-year agreement with Citi as the exclusive issuer of the AAdvantage co-branded credit card portfolio is expected to drive substantial incremental value, potentially increasing revenue from loyalty programs and improving earnings.
  
• The company's reengineering initiatives delivered $500 million of value, helping reduce costs and improve efficiencies, which may lead to better net margins and overall profitability.
  
• American's planned expansion of its long-haul international-capable fleet and enhancement of premium services, including new flagship suites and high-speed WiFi, are expected to grow revenue through an improved customer experience and potentially higher demand.
  
• Restoring and optimizing agreements with agency partners and corporate customers aims to recover revenue share from indirect channels and enhance revenue growth, supporting stronger earnings.

American Airlines Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Airlines Group's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $3.4) by about February 2028, up from $846.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $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 7.5x on those 2028 earnings, down from 12.4x today. This future PE is lower than the current PE for the US Airlines industry at 13.8x.
• 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 11.41%, as per the Simply Wall St company report.

American Airlines Group Future Earnings Per Share Growth

Risks

• Economic uncertainties and macro risks could impact expected revenue growth and profitability, as broader economic conditions may influence demand for air travel.
  
• Increasing non-fuel unit costs, particularly due to new labor agreements and bringing back corporate sales strategies, could pressure net margins despite planned operational efficiencies.
  
• Continued reliance on indirect channels and partnerships for revenue recovery poses execution risks, which could affect projected revenue growth if not successfully managed.
  
• The shift in capacity towards higher-cost regional aircraft and potential stagnation in main cabin demand could impact operating margin improvements and net income growth targets.
  
• Rising capital expenditures for fleet expansion and technology investments, amidst ongoing debt reduction goals, may strain cash flows and impact short-term earnings if not balanced effectively.

Valuation

• The analysts have a consensus price target of $20.859 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 $30.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $62.7 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $15.97, the analyst price target of $20.86 is 23.4% 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.