MER update 4/26/2015
Results reiterate several positive views this earnings season
AAL’s 1Q15 results reiterated a lot of the views heard this earnings season,
particularly around good cash flow generation, continued capacity discipline and
potential improvement in PRASM after 2Q15. While our 2015E EPS does come
down due to a higher fuel environment ($10.04 from $10.63), we continue to rate
AAL a Buy given the company’s significant free cash inflection (nearly $5B
improvement in 2015), margin momentum and synergy potential.
Another $1B cash flow quarter from an airline company
In 1Q15 AAL generated $1.1B in free cash despite it being the weakest earnings
quarter of the year, and the company is now the third airline to report over $1B in
cash flow (UAL $1.6B, DAL $1.1B when hedge margin recovery is included, LUV
$0.8B). While AAL did not outline a specific strategy for this cash and the nearly
$10B currently on its balance sheet, management seems committed to returning
this to shareholders in a more opportunistic rather than programmatic fashion given
integration costs ($1.2-1.5B) and delivery schedule ($6.4B in 2015 capex).
Maintaining capacity discipline, delaying Boeing 787s
Despite the cash flows mentioned above, AAL remains capacity disciplined and could
reduce capacity as it plans out its 4Q15 schedules in more detail. As evidence of this,
the company is delaying delivery of 5 Boeing 787s from 2016 into 2017 (4 will be
delivered) and 2018 (1 will be delivered) given weaker demand in int’l mkts. These
deferrals alone reduce system capacity by 0.6% next year, and based on our
forecasts reduces capex by $500M.
Big PRASM headwinds remain in 2Q, could be trough
AAL effectively communicated the headwinds it sees in 2Q. Despite having the
toughest comps of the year (+5.9% vs. +2.2% for full year 2014), AAL also sees
headwinds from F/X (200bps), fuel surcharges (70bps) and Venezuela (50bps).
These ease in the second half of the year, particularly in 4Q, which could mean that
2Q marks the trough in PRASM declines
