American Airlines: A Lot Better Than It Was In 2020

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American Airlines: A Lot Better Than It Was In 2020

seekingalpha2021-09-06

Summary Airlines are recovering from the pandemic more quickly than expected, and AAL forecasts a full recovery by 2022. During the pandemic, AAL modernized their fleet and entered several strategic ...

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Linda1127
·2021-09-07
Hope the shares of AAL will be up today
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Eskay_Tew
·2021-09-06
Market reopening taking place quicker abit
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eo1668
·2021-09-06
done
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yl2021
·2021-09-06
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  2021-09-06
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American Airlines (AAL) took the pandemic as an opportunity to modernize its fleet of 737s and A321s, create strategic codesharing partners, and permanently lower operating costs. We believe that AAL will eventually ascend to above pre-pandemic levels to reflect a better than pre-pandemic business model.\nOverview\nAmerican Airlines is a leading player in the intensely competitive air travel industry. They operate almost entirely passenger flights, although they did briefly dabble in cargo-only flights during the pandemic. AAL operates a fleet of Boeing (BA) 737s and Airbus(OTCPK:EADSF)A321s.\nAmerican Airlines (AAL) stock has been falling nearly constantly for the past 4 years. From highs of ~$60 in late 2017 to a pre-pandemic level of around $30, AAL bottomed at just under $10 in mid-2020 before rebounding to the current price of $19.37 at the time of writing.\nRate of Recovery\nThe airline industry as a whole is showing strong signs of rapid recovery in 2Q21. Evidenced by a near 100% jump in AAL QoQ revenues, from ~$3.5 billion 1Q21 to ~$6.9 billion 2Q21, people are eager to get back into the air.\n2Q21 resultswere closer than expected to pre-pandemic levels, with revenue totaling ~60% of 2019 levels led by a hike in demand for leisure travel. In theirrecent conference call, AAL claimed that in some aspects, leisure travel has made a full recovery. This is further evidenced bythird-party market research, which indicates that ~80% of Americans have some form of travel plans for the remainder of 2021.\nDemand for business travel is not recovering quite as fast, but recent results from small and medium-sized businesses are promising. AAL's small and medium-sized business travel demand has increased QoQ from 20% of 2019 in Q1 levels to 45% of 2019 levels in Q2. During the call, AAL expressed their expectation of, \"a full business travel recovery in 2022,\" citing the fact that 50% of their corporate customers have lifted their travel restrictions, and ~2/3 of corporate customers intend to be back in the office come year-end 2021.\nFull recovery of their business travel sector in 2022 is quite optimistic, especially considering the politics surrounding a return to normalcy. We think a near-full business recovery by the end of 2022 is more realistic, as vaccination rates continue to rise and people become more comfortable going into public spaces.\nWe do expect a slower rate of recovery on the international travel front, as certain countries lag behind in vaccination rates. International travel should not be a major concern for shareholders at the present moment, as attention should be focused on domestic leisure and business flights, but we do expect a near-full return of international travel to pre-pandemic levels by the end of FH23.\nPandemic reset\nAs mentioned above, AAL took Covid as an opportunity to re-evaluate its business model and make much-needed changes.\nFleet updates\nBy the end of 2Q21, AAL was entirely done with its Boeing 737 updates and has entered the final stages of its Airbus A321 modernization. The updates include more seats, best-in-industry WiFi, power to every seat, and pre-loaded content for onboard entertainment.\nAAL also noted that because the modernization of their fleet is behind them, they expect a sub $1 billion CapEx figure for FY22 and FY23. For perspective, 2018 and 2019 CapEx was $3.7 billion and $4.3 billion respectively. This should represent a significant increase in net income relative to 2019 in the event of a return to prior levels of demand.\nIn the airline industry, comfort is among the top passenger concerns. The high-speed WiFi, as well as personal power outlet, should act to improve the passenger experience, which we believe will improve customer retention.\nStrategic partners\nAAL is a founding member of Oneworld airline group, an alliance of 14 international airlines that allows members to redeem points earned on any airline with any other airline in the group, work together to achieve climate goals, and give customers a seamless experience when dealing with other airlines in the group.\nAAL also entered into 2 strategic codesharing partnerships with JetBlue (JBLU) and Alaska Airlines (ALK). Codesharing is a term used when 2 airlines market the same flight and then split the profit from the tickets sold, which basically means ALK and JBLU flights can be marketed on AAL's website. While still too early to draw a conclusion on the efficacy of these partnerships, AAL expressed confidence in the early results saying that \"about 20% of our early booking data is from Intrawest customers, the exact customer that we previously were not getting.\" AAL's partnerships also allow passengers shared use of lounges and use of flight miles across airlines.\nWe see these partnerships as a unique advantage for AAL, while they likely will not bring on a lot of passengers by themselves, the improvement in passenger experience and increase in the value of frequent flier miles can go a long way in such a competitive industry.\nValuation\nTo come up with an approximate price target for AAL, what we will do is use the figures to predict a 2023 net income, then adjust it to the PE ratio from pre-pandemic, to come up with an approximate fair value.\nLet's come up with a revenue prediction first. Here is a chart of AAL's revenue over the past 5 years.\nData byYCharts\nAs you can see, revenue was steadily increasing to the eventual 2019 revenue of $45.7 billion.\nWe believe strongly that due to their partnerships, inflation, heightened demand for leisure travel, and rebounding business demand that 2023 revenue will be considerably higher than 2019 revenue. However, in the name of being conservative, we will assume a modest 2023 revenue figure of $45 billion.\nTheir interest expense in the year 2019 was $1.1 billion. Assuming they hold true to their promise and use the additional cash pile to pay down approximately 1/2 of their debt, this number, in theory, should reduce by 50%. However, this is a generous assumption that relies on a lot of factors, so we will reduce interest expense by just over 25%, to $750 million, representing a savings of $300 million annually.\nTheir 2019 cost of revenue plus operating expenses came in at just over $40 billion. They claim to have generated a \"permanent savings of $1.3 billion annually,\" relating to a reduction in headcount and other efficiencies from Covid. We will assume this number will be quite a bit lower at $500 million to account for higher than expected rehiring, demand for higher wages due to inflation, and to be conservative.\nThis represents a total savings of $800 million from both operating and interest expenses generated annually.\nThe calculation\nTheir net income margin for 2019 was 3.5%. Using a revenue figure of $45 billion leaves us with a net income of ~$1.5 billion. After adding on our $800 million in savings, we are left with a 2023 net income of ~$2.3 billion.\nData byYCharts\nPrior to the pandemic, the PE ratio was ~8. This is considerably lower than the S&P 500 average, and we feel it warrants a higher PE, but let's use 8 to be conservative.\nFor a company with a net income of $2.3 billion to have a PE ratio of 8, the market cap must but $18.4 billion. Using AAL's current market cap of $12.34 billion, we arrive at a price target of $28.88 per share.\nWe feel that 15 is a more reasonable PE ratio for a company like AAL in the position we expect in 2023. At 15 PE, we get a price target of $54.14.\nApplying the current S&P 500 PE ratio of 35.38, we get a price target of $127.73.\nRisks Significant debt levels\nAs of theirlatest balance sheet report, AAL currently has ~$22.6 billion in current assets, and ~$22.5 billion in current liabilities, ~$2.5 billion of which is made up of debt due in 2022.\nCommitted to paying down $8-$10 billion of debt by 2025, AAL paid off $985 million in the 2Q21, not including $950 million that they reportedly prepaid the morning of the conference call, bringing their Q2 debt reduction total to ~$1.93 billion.\nWe, along with management, believe that the goal of paying off $8-$10 billion worth of debt by 2025 will come relatively easily. AAL currently holds an elevated liquidity position of over $20 billion to reflect the uncertainty of the pandemic; and plans to lower their liquidity position to $10-$12 billion by year-end 2022, using all excess cash to reduce their leverage. Given that AAL has already generated FCF for the FH21, this cash pile is unlikely to be eaten away by cash burn; in fact, the opposite is true and this pile will most likely grow.\nIntense competition\nThe airline industry is intensely competitive, and AAL faces competition from Southwest (LUV), Delta (DAL), United (UAL), and more. Despite strong competition, airlines are able to gain relative advantages through several strategies. In AAL's case, they offer a popular customer loyalty program, which is back to 80% of the 2019 number of transacting members. AAL is also recently armed with 21st-century amenities, such as high-speed WiFi and power at every seat.\nWe do not think that competition will act as a major downward pressure, as AAL has battled competition for years, and now has several additional advantages likely to marginally improve customer retention.\nConclusion\nThe airline industry faces strict competition, but AAL has been able to survive in the past and is coming out of the pandemic armed with an upgraded fleet and strategic partners, we rate AAL as a buy and a solid recovery play.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":880992042,"gmtCreate":1631006307186,"gmtModify":1676530440415,"author":{"id":"4091084014142520","authorId":"4091084014142520","name":"Linda1127","avatar":"https://community-static.tradeup.com/news/e698ee2dfbe4632bdd606a5fcfe89d5e","vip":1,"hat":"https://static.tigerbbs.com/0a8758340a08196056f8bc1e54805193","crmLevel":6,"crmLevelSwitch":1,"idStr":"4091084014142520","authorIdStr":"4091084014142520"},"htmlText":"Hope the shares of AAL will be up today&nbsp;","listText":"Hope the shares of AAL will be up today&nbsp;","text":"Hope the shares of AAL will be up today","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/880992042","repostId":1104945018,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":817827960,"gmtCreate":1630934091750,"gmtModify":1676530423675,"author":{"id":"3578561972068295","authorId":"3578561972068295","name":"Eskay_Tew","avatar":"https://static.tigerbbs.com/c955d556458f3e647eb3cbf75c2f8f54","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3578561972068295","authorIdStr":"3578561972068295"},"htmlText":"Market&nbsp;reopening taking place quicker abit&nbsp;","listText":"Market&nbsp;reopening taking place quicker abit&nbsp;","text":"Market reopening taking place quicker abit","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/817827960","repostId":1104945018,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":817168890,"gmtCreate":1630920149010,"gmtModify":1676530420796,"author":{"id":"3560376076037644","authorId":"3560376076037644","name":"eo1668","avatar":"https://static.tigerbbs.com/039a625a00fac8daa05bb87ff64ecd3c","vip":1,"crmLevel":6,"crmLevelSwitch":1,"idStr":"3560376076037644","authorIdStr":"3560376076037644"},"htmlText":"done&nbsp;","listText":"done&nbsp;","text":"done","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/817168890","repostId":1104945018,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":817163218,"gmtCreate":1630919937734,"gmtModify":1676530420772,"author":{"id":"3576231438371359","authorId":"3576231438371359","name":"yl2021","avatar":"https://static.tigerbbs.com/9130003d93212acf586123bc8fe8a1e0","vip":1,"crmLevel":3,"crmLevelSwitch":0,"idStr":"3576231438371359","authorIdStr":"3576231438371359"},"htmlText":"Like &amp; comment","listText":"Like &amp; comment","text":"Like & comment","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/817163218","repostId":1104945018,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5769539,"gmtCreate":1630920155262,"gmtModify":1663233461528,"authorId":3560376076037644,"author":{"id":3560376076037644,"idStr":"3560376076037644","authorId":3560376076037644,"name":"eo1668","avatar":"https://static.tigerbbs.com/039a625a00fac8daa05bb87ff64ecd3c","vip":1,"crmLevel":6,"crmLevelSwitch":1,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":817163218,"type":1,"supId":0,"prevId":0,"content":"done","text":"done","html":"done"}],"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":38,"commentSize":4,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}