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Morningstar | American continues to streamline operations, navigating the post-consolidation U.S. airline industry

American Airlines’ management is betting that a newer fleet, a more aggressive balance sheet, and ongoing cabin segmentation will position the company for competitive success against its network peers and enable it to compete more effectively with ultra-low-cost carriers. This strategy rests on operating newer aircraft that require less maintenance than older aircraft, guzzle less gas, and can offer a more pleasant passenger experience. Given American's refleeting strategy, it now has by far the youngest fleet among the major U.S. airlines. These newer aircraft will require higher capital outlays over the near term and entail higher depreciation expenses over the longer term. To finance its strategy, American has loaded up on debt, which it typically securitizes with aircraft. We think American can squeeze more efficiency out of its operations as it continues to work through its merger with US Airways. The company is more than halfway through integrating the merger, which has been executed fairly smoothly, particularly when compared with other airline combinations. This gives us confidence that management’s expectation of driving further cost savings and efficiency through reduction of overlapping functions and head count throughout will bear fruit. While new cabin offerings such as basic economy will enable American to drive more revenue, the move is being mirrored by United. Delta has been offering basic economy since 2014. Given our energy team's thesis that oil prices will begin falling in 2019 and normalize at $60 per barrel (Brent) by 2021-22, American’s strategy looks a bit riskier than Delta's, which emphasizes a cleaner balance sheet and older but less efficient aircraft. Still, we think American's management will continue to streamline its operations and realize revenue opportunities. Thanks to significant industry consolidation, American’s operating margins should remain positive across the cycle--a clear break with much of its history, which featured booms and busts.