Morningstar | American Lessens First-Quarter Expectations With Investor Update, but We're Maintaining Our FVE
We’re maintaining our $41 fair value estimate after American Airlines updated investors on several first-quarter developments. While the market reacted severely to American’s update, we only made minor alterations to our 2019 forecast and held our long-term assumptions. When adjusting our model, we gradually raised 2019’s capacity growth (10-basis-point increase) for management’s marginally higher first-quarter available seat miles (66.7 billion versus 66.6 billion). Higher capacity growth in our model doesn’t translate to materially lower unit costs because indefinite MAX groundings and other issues mentioned in today’s update imply American will suffer from sub-optimal flying with MAX aircraft out of service. We suspect network reorganization and potential retirement delays will undermine the cost savings American planned for early 2019. Similarly, we expect MAX groundings will weigh on expected unit revenue inflation, evidenced by management’s lowered unit revenue expectations. American now guides for unit revenue growth with a midpoint around 50 basis points instead of 1%.American’s update revealed 1,200 flight cancelations thanks to MAX groundings and more announced cancelations through June 5, 2019, but the carrier stopped short of calling out financial costs related to suspensions. We preserved our full-year unit revenue growth target, below 1%, amid MAX cancelations, management’s lowered TRASM growth range, and reported demand softness in leisure and Atlantic markets.
We still expect total unit costs will fall below 2018’s $.1485, sliding a little under 2% thanks to lower oil prices. However, we lowered our per unit fuel cost decline by 1 percentage point after observing management’s revised jet fuel price projection ($2.02 to $2.07), which is incrementally higher than the top end of its previous guided range ($1.97 to $2.02). Operating margins for 2019 are only about 10 basis points lower than our previous forecast following our valuation updates.
American Airlines Group is a holding company. Through its subsidiaries, the company's business activity is the operation of a primary network carrier, providing scheduled air transportation for passengers and cargo. The company's regional carriers provide scheduled air transportation under American Eagle. The American Eagle carriers include the company's regional carriers Envoy Aviation Group Inc., PSA Airlines, Inc. and Piedmont Airlines, Inc., as well as third-party regional carriers including Republic Airline Inc., Mesa Airlines, Inc., SkyWest Airlines, Inc. and Compass Airlines, LLC. The company's cargo division provides freight and mail services, with facilities and interline connections available across the globe.
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