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Morningstar | Investors Head for the Emergency Exit Following American 4Q Guidance Revision; Lowering FVE

We’re lowering our fair value estimate for American Airlines to $41 from $46 after revised fourth-quarter and full-year guidance signaled weak passenger yields in domestic markets. Following Delta’s guidance update, which ignited concerns about poor demand, American did little to allay investor fears with its revised fourth-quarter and full-year unit revenue outlook. Initially, the carrier expected total revenue per seat mile, or TRASM, would increase between 1.5% and 3.5% year over year for the fourth quarter, but today’s update reflected growth near the bottom of this range at 1.5%. We lowered our TRASM forecast for 2018 and in subsequent years, assuming American will pass through more of its fuel cost savings to customers than we initially expected. For 2018, our model now shows TRASM closer to 15.80 cents, instead of 15.85 cents, which represents a full-year increase of about 2.5% over 2017. Shares crept into 4-star territory following a steep sell-off, but we believe investors should remain cautious.

American’s investor update indicates decelerating unit revenue growth, but management is maintaining its adjusted pretax margin estimates, with the carrier aiming for a range of 4.5% to 6.5%. Our DCF model reflects an adjusted pretax margin close to 6%, amid costs per available seat mile excluding fuel and special items, CASM-ex, registering a gain close to 2% year over year. We expect American will continue its cost savings campaign through our 2022 midcycle year, with assistance coming from oil prices hovering around our $60 midcycle price, but margin accretion will materialize at a slower pace in our updated forecast. We now expect operating margins will finish 2018 below 6%, rather than at 6.5% in our previous forecast, due to weaker domestic yield growth. Likewise, we expect American will record operating margins closer to 7.5% in 2019, instead of near 8.5% thanks to yield growth falling below 1% starting in 2019 and turning negative through 2022.