Tuesday, February 02, 2016 11:47:27 AM
American Airlines Delivers Strong Earnings, but Skeptics Abound
The airliner's stock has been brought down by weak unit revenue trends -- but improvement is just around the corner.
Adam Levine-Weinberg (TMFGemHunter) Feb 2, 2016 at 8:50AM
Coming into its Q4 earnings report last week, American Airlines (NASDAQ:AAL) had reported a record profit in each of the eight quarters since it merged with US Airways in late 2013.
On Friday, American made it nine in a row. The company produced an adjusted pre-tax profit of $1.29 billion in Q4, up from $1.10 billion a year earlier. Adjusted earnings per share soared 32% from $1.52 to $2.00, lifted by American Airlines' heavy share buyback activity in addition to its net income growth.
Airline American Airlines Plane Aal
AMERICAN AIRLINES REPORTED ANOTHER RECORD PROFIT FOR Q4. IMAGE SOURCE: AMERICAN AIRLINES.
Even as American Airlines has continued generating strong EPS growth, investors have clearly lost confidence in the company due to its persistent unit revenue declines. However, American Airlines may be in better shape than many people realize.
Earnings and the stock price diverge
In 2013, American Airlines and US Airways earned a combined adjusted profit of $1.9 billion. Since then, the combined company's profit has soared. Adjusted net income reached $6.3 billion last year as American Airlines reaped the full benefit of lower fuel prices.
Up until early 2015, American Airlines' stock price rose along with its earnings. However, in the past year or so, American Airlines stock has started to lose ground even as the company's profit continued to rise.
AAL Chart
AMERICAN AIRLINES NET INCOME VS. STOCK PERFORMANCE. DATA BY YCHARTS.
Airline investors don't seem to treat earnings growth driven by fuel cost savings as "real" when it is accompanied by declining unit revenue. And American's passenger revenue per available seat mile (PRASM) came under severe pressure in 2015, due to the strong dollar, economic weakness in key foreign markets like Brazil and Venezuela, and rising competition from Southwest Airlines (NYSE:LUV), particularly in Dallas.
PRASM dropped 1.7% in Q1 2015 and the declines accelerated from there. For the full year, PRASM fell 5.4% year over year. As unit revenue trends headed south, so did American Airlines' share price. With PRASM expected to decline 6% to 8% in Q1, it's not surprising that the stock hasn't recovered.
Revenue trends will improve later this year
American Airlines executives told investors last week that unit revenue trends should improve throughout 2016. This guidance seems realistic for several reasons.
First, year-over-year comparisons will get much easier after this quarter. As noted above, American's PRASM fell 1.7% in Q1 2015. In Q2, the pace of decline worsened to 6.9%, and it remained at a similar level for the rest of the year.
Second, competitive dynamics will improve in the second half of 2016. Southwest Airlines operated 153 daily departures in Dallas at the beginning of 2015, but it ramped up its schedule to 180 daily departures by August.
Airline Southwest Airlines Plane Luv Boeing
SOUTHWEST AIRLINES GREW RAPIDLY IN DALLAS LAST YEAR. IMAGE SOURCE: THE MOTLEY FOOL.
As a result, American won't fully lap the impact of increased competition from Southwest until this August. However, after that, it should benefit from capacity constraints that will prevent Southwest Airlines from adding any more flights in Dallas.
Third, weakness in Brazil and Venezuela will have less of an impact on American Airlines going forward. American Airlines President Scott Kirby noted that Brazil represented more than 6% of the company's revenue in late 2013 but just 2% by last November. Additionally, the 2016 Olympic Games in Rio de Janeiro should provide a boost in travel to Brazil during Q3.
Fourth, American completed its reservation system integration in October, which will allow it to refine its flight schedules to put the right airplanes in the right markets. This should unlock about $300 million in annual revenue synergies over the next year or two.
Looking ahead
Thus, American Airlines has a number of key catalysts coming in the next two or three quarters that should improve its unit revenue performance. It also has other initiatives in the works that should bolster unit revenue beginning later in 2016.
Pe
AMERICAN WILL ADD PREMIUM ECONOMY SEATS FOR LONG-HAUL FLIGHTS. PHOTO: AMERICAN AIRLINES
For example, American will introduce the first true long-haul premium economy section among U.S. airlines in late 2016. This will offer a middle-ground for customers who are willing to pay extra for a more comfortable seat but can't afford a business class ticket.
American Airlines is also following its peers by moving from a miles-based to a spending-based loyalty program in late 2016. This could have revenue benefits because it will result in fewer award tickets for customers who buy the lowest fares.
Finally, American is working on a "basic economy" fare type to appeal to more price-sensitive travelers. This approach helped Delta Air Lines minimize its unit revenue declines last year. The new fare type should be ready for launch later this year.
With all of these catalysts ahead, American Airlines' unit revenue trajectory should improve steadily going forward. With the stock trading for less than 6 times forward earnings, there's plenty of upside if investors gain confidence that American's recent profit growth won't be swallowed up by revenue declines in the next few years.
A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early-in-the-know investors! To be one of them, just click here.
Adam Levine-Weinberg is long January 2017 $40 calls on Delta Air Lines, and long January 2017 $30 calls on American Airlines Group. The Motley Fool is long January 2017 $35 calls on American Airlines Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
The Stupid Simple Way to Score a 22% Dividend
There's nothing better than cold, hard cash. That's why the savviest investors are using 5 simple dividend "tricks" to unlock the mountains of cash stocks are delivering to investors on a silver platter. Just click here to learn how you could score your cut of the profits too!
COMMENTS
AUTHOR
Adam Levine-Weinberg (TMFGemHunter) Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!
ARTICLE INFO
Feb 2, 2016 at 8:50AM
Industrials
STOCKS
Southwest Airlines
NYSE:LUV
$36.90 $-1.41 (-3.68%)
American Airlines Group
NASDAQ:AAL
$38.17 $-1.21 (-3.07%)
READ MORE
Expect More Buybacks at American Airlines Group, Inc.
Delta Pounces on American Airlines' Exit from Tel Aviv
Will Delta Air Lines, Inc. Raise Its Dividend in 2016?
Brazil's Economy Tumbles: How Are Airlines Responding?
Will Southwest Airlines Raise Its Dividend in 2016?
COMPARE BROKERS
Have feedback on The Motley Fool site? We'd love to hear from you.
Copyright, Trademark and Patent Information
Terms of Use
Privacy Policy
Please read our Terms and Conditions
© 1995 - 2016 The Motley Fool. All rights reserved.
BATS data provided in real-time. NYSE, NASDAQ and NYSEMKT data delayed 15 minutes.
Real-Time prices provided by BATS BZX. Market data provided by Interactive Data.
Company fundamental data provided by Morningstar. Earnings Estimates, Analyst Ratings and Key Statistics provided by Zacks.
SEC Filings and Insider Transactions provided by Edgar Online.
Powered and implemented by Interactive Data Managed Solutions. Terms & Conditions
Interactive Data
FollowShare
Toggle Dock
Recent AAL News
- American Airlines Reports Second-Quarter 2024 Financial Results • GlobeNewswire Inc. • 07/25/2024 11:00:00 AM
- U.S. Index Futures Mixed After Tech Sell-Off, Oil Prices Drop on Weak China Demand and Ceasefire Expectations • IH Market News • 07/25/2024 10:21:35 AM
- The Gross Law Firm Reminds Shareholders of a Lead Plaintiff Deadline of September 16, 2024 in American Airlines Group Inc. Lawsuit - AAL • PR Newswire (US) • 07/25/2024 09:45:00 AM
- U.S. Stocks Move Sharply Lower On Disappointing Earnings News • IH Market News • 07/24/2024 08:39:47 PM
- Berkshire Sells BofA Holdings, Ryanair Shares Drop 12%, Delta Still Struggling After IT Disruption • IH Market News • 07/22/2024 09:44:17 AM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 07/15/2024 08:18:33 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 07/15/2024 08:18:01 PM
- American Airlines Group announces webcast of second-quarter 2024 financial results • GlobeNewswire Inc. • 07/11/2024 02:00:00 PM
- Apple Joins OpenAI Board, Logitech President Opts Out of Reelection, and More News • IH Market News • 07/03/2024 10:59:39 AM
- American Airlines releases 2023 Sustainability Report • GlobeNewswire Inc. • 07/02/2024 07:00:00 PM
- American Airlines commits to conditional purchase of 100 ZeroAvia hydrogen-powered engines, increases investment in hydrogen-electric innovator • GlobeNewswire Inc. • 07/02/2024 12:00:00 PM
- UPS Divests Coyote Logistics in $1.025 Billion Deal with RXO, Under Armour Agrees to $434 million Settlement, and More News • IH Market News • 06/24/2024 11:00:20 AM
- Honeywell Acquires CAES Systems for $1.9 Billion, Sarepta Therapeutics Surges 34%, Gilead Continues Gains • IH Market News • 06/21/2024 12:00:38 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:27:06 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:26:20 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:25:48 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:25:17 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:24:48 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:24:12 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:23:32 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:23:03 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:22:32 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/06/2024 09:22:01 PM
- Nvidia Becomes 2nd Most Valuable Company in the USA, ASML Takes 2nd Spot in Europe, and More News • IH Market News • 06/06/2024 11:34:59 AM
- Form 8-K - Current report • Edgar (US Regulatory) • 06/05/2024 09:06:04 PM
FEATURED Southern Silver Files NI43-101 Technical Report for its Updated Preliminary Economic Assessment for the Cerro Las Minitas Project • Jul 25, 2024 8:00 AM
Greenlite Ventures Completes Agreement with No Limit Technology • GRNL • Jul 19, 2024 10:00 AM
VAYK Expects Revenue from First Airbnb Property Starting from August • VAYK • Jul 18, 2024 9:00 AM
North Bay Resources Acquires Mt. Vernon Gold Mine, Sierra County, California, with Assays up to 4.8 oz. Au per Ton • NBRI • Jul 18, 2024 9:00 AM
Nightfood Holdings Signs Letter of Intent for All-Stock Acquisition of CarryOutSupplies.com • NGTF • Jul 17, 2024 1:00 PM
Kona Gold Beverages Reaches Out to Largest Debt Holder for Debt Purchase Negotiation • KGKG • Jul 17, 2024 9:00 AM