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Morningstar | American Reveals Impact of MAX Disruptions, but We're Maintaining our FVE

We altered our expectations but maintained our $41 fair value estimate for American after the carrier disclosed the impact of MAX groundings through August and confirmed growth plans for 2019. The August deadline aligns with our updated timeline for MAX suspensions (three to nine months). We found management’s expectations for a one percentage point hit to capacity growth in 2019 reasonable given American’s limited exposure to suspended 737s. The 24 MAX aircraft American operated at the time of suspension composed about 2% of its mainline fleet and mostly served routes connected to Miami. We anticipate a combination of larger narrow-body and smaller wide-body aircraft will relieve the absence of suspended MAX aircraft through August.

We now model capacity growth of almost 2.5% in 2019 after slashing domestic capacity additions, but we still forecast load factors 30 basis points lower than the 82% that American posted last year. Gate additions in Dallas during 2019 will continue amid MAX suspensions and allow capacity to outpace revenue passenger mile growth near 2%. Passenger yields were unimpressive for the March quarter, declining more than 1% versus last year, but we expect yields will rebound during the year. American joined a chorus of carriers signaling strong close-in yields in leisure and corporate markets, but also for premium and economy bookings. With yields reversing first-quarter declines and capacity growth dialed back, total revenue per available per seat mile should increase 1% over 2018.

We altered unit cost assumptions in our model for rising fuel costs and MAX-related expenses. Unit costs (costs per available seat mile) are now flat compared with 2018, with Brent oil prices climbing above $70 and rolled-back capacity soaking up less overhead. Management issued a new range for non-fuel unit cost inflation in 2019 (2%-3%). Our model produces non-fuel CASM of 2%, with pretax margins down 100 basis points versus our previous 8% forecast.