EUR 850.00 For Business Accounts Only

Morningstar | AAL Updated Star Rating from 25 Jan 2019

No-moat American Airlines sparked investor optimism with its 2019 guidance that featured unit revenue improvement. After a concerning early January update, American reassured investors that unit revenue growth would remain buoyant with the backing of $1 billion in revenue initiatives that included expansions at its highly profitable Dallas-Fort Worth hub and fleet upgauging. American even made a note to estimate that unit revenue would increase more quickly than its network competitors, which we find challenging. After revising our model and incorporating the company’s latest update, we’re leaving our $41 fair value estimate and no-moat rating intact.

American raised investor confidence with its latest plans to increase growth in total revenue per available seat mile above peers while also raising capacity growth. Management expects TRASM growth will finish flat to 2% in the first quarter, leaving full-year growth above the less than 1% increase we model if the latter half of 2019 resembles the same period in 2018. While we're encouraged by American’s growing confidence, we remain cautious on the carrier’s plans to increase capacity 3% in 2019 and achieve industry-leading RASM growth. To be sure, American is readying to move beyond the integration of its 2013 merger with US Airways and positioned to expand at its margin-accretive Dallas-Fort Worth hub. However, we think unit revenue growth near inflation will prove challenging, given American's capacity expansion plans late in the industry’s upcycle.

For 2018, American logged 7% higher growth in costs per available seat mile, with total fuel costs rising 31%. On the heels of Brent’s retreat from lofty levels in 2018, we expect American’s pretax margins will land at 8% in 2019, representing approximately 200 basis points of expansion. We project unit cost inflation, which excludes fuel and special items, will finish close to 1.5% over 2019, closer to the bottom of management's 1%-3% range.

With management’s revenue and cost initiatives, American expects to register adjusted EPS of $5.50-$7, about 40% higher than 2018. Our current model reflects adjusted EPS closer to $6.06, with higher-than-expected capacity growth producing a slightly under 1% TRASM increase. Indeed, bookings remain healthy in the early innings of 2019, and we believe American will look to generate value from growing cabin segmentation across its fleet and upgauging. However, we don’t believe American is exempt from the growing challenges facing air travel markets, and we think its plan to accelerate capacity growth will probably weigh on unit revenue.