American Announces $2 Billion Share Buyback As Lower Oil Prices Lift Profit
American Airlines (NASDAQ:AAL) will buy back shares worth $2 billion through 2016 as lower oil prices lifted its fourth quarter profit to a record $1.1 billion. [1] During the fourth quarter, global crude oil prices fell sharply – from over $95 per barrel (Brent) in early October to under $60 per barrel by the end of December. As American does not hedge fuel prices, it was able to fully realize the benefit from this steep fall in crude oil prices. Many other airlines were forced to buy jet fuel at higher than market rates in the fourth quarter due to their hedging positions, which prevented them from getting the entire benefit from the fall in crude oil prices. American’s fuel expense fell by about 20% or $534 million annually in the fourth quarter, lifting its profit. [1] This strong fourth quarter performance enabled American to complete a very successful first year of its merger with US Airways. For full year 2014, American reported a profit, excluding special items, of $4.2 billion, leading other airlines in a strengthening U.S. airline industry. [1]
Looking ahead, with crude oil prices (Brent) persisting around $50 per barrel, American expects to spend about $1.71-1.76 per gallon on jet fuel in the first quarter of 2015, down from $2.52 per gallon that it spent in the fourth quarter of 2014. [2] So, American’s fuel expense will likely continue to fall in the first quarter if crude oil prices do not sharply rise in February and March (which is unlikely in our opinion). Additionally, with oil production rising from the U.S. and OPEC not resorting to production cuts, the supply glut in the oil market is likely to persist for the foreseeable future, maintaining pressure on crude oil prices. So, 2015 is shaping up to be an even better year for American.
We currently have a price estimate of $50 for American, around 5% below its current market price.
- Should You Pick American Airlines Stock At $14 After A 6% Fall In A Week?
- With 20% Gains This Month Is Alaska Air A Better Pick Than American Airlines Stock?
- Which Airlines Stock Will Offer Better Returns – American Or United?
- What To Expect From American Airlines’ Q2?
- Will American Airlines Stock Recover To Its Pre-Inflation-Shock Level?
- Pick Either American Airlines Stock Or Its Peer – Both May Offer Similar Returns
See our complete analysis of American here
Capacity Expansion Will Aid Gains From Lower Fuel Costs In 2015
Apart from lower oil prices, American’s 2015 results will be driven by capacity expansion. The carrier currently plans to add capacity at a modest rate of 2-3% per year in 2015. [2] Initially, there were fears that lower oil prices could compel large network carriers – American, United and Delta – to accelerate capacity growth. This would have had an adverse effect on the airline industry’s profitability as increased supply of seats would have pressurized air fares and profitability of all carriers. American with this latest capacity guidance has put those fears to rest for now.
That said, we figure even this disciplined capacity growth could lift American’s passenger traffic and top line in 2015. The carrier’s operating margin will likely also expand on lower fuel costs. So, American looks set to retain its growth momentum in 2015.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- American’s 2014 Q4 earnings form 8-K, January 28 2015, www.aa.com [↩] [↩] [↩]
- American’s investor update in January 2015, January 27 2015, www.aa.com [↩] [↩]