American Aims for $6.70 Though Fuel Prices Make it a Choppy Ride
American Airlines (NYSE:AMR) recently announced its Q2 2011 results posting a higher net loss of $286 million compared to a $11 million loss the previous quarter primarily due to the growing burden of rising jet-fuel prices. While these results are disappointing, we believe that in the medium-term American will reign in the costs and benefit from growing demand for air travel and an improving macro environment. It announced several immediate measures to reduce costs and improve revenue performance that include the cancellation of some unprofitable routes and a major renewal of its fleet. American Airlines is one of the largest passenger airline in the world by available seat miles and is the principal subsidiary of the AMR Corporation (AMR) and competes with Delta Airline (NYSE:DAL), Southwest Airlines (NYSE:LUV), United Continental (NYSE:UAL) and U.S. Airways (NYSE:LCC).
We have a $6.70 price estimate for American Airlines, which is about 30% ahead of the current market price.
Higher fares boost revenues, but high fuel costs cause losses
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Although American’s revenues for the quarter increased 8% due to increased fares, its performance was negatively affected by fuel costs that rose to more than half a billion dollars during the same period. Despite fuel hedging, AMR’s fuel prices increased 31% compared to Q2 2010.
While available seat miles (ASM) increased slightly with selective capacity addition, the passenger revenue per available seat mile (PRASM) grew by 5%. This was due to the trend of rising average fares that increased 5% during the quarter. For 2011, AMR expects its ASMs to increase 2.6% and an average fuel price of $3.06 per gallon. This compares to an average fuel price of $2.32 per gallon in 2010.
Major fleet agreements with Boeing and Airbus to transform fleet
Under the new agreements, American will acquire 460 narrow-body aircraft from the Boeing 737 and Airbus A320 families beginning 2013, making it the largest aircraft order in aviation history. These new aircraft with state-of-the-art amenities will allow American to reduce its operational costs and fuel expenses leading to better seat mile economics and performance characteristics.
These deliveries will provide American with the youngest and most fuel-efficient fleet among its U.S. airline peers in about five years. The agreement is also likely to benefit the company with approximately $13 billion of committed financing from the manufacturers through lease transactions, and this will help maximize balance sheet flexibility and reduce risk.