Currency Fluctuations May Hit American’s Earnings in 1Q15

+6.17%
Upside
15.35
Market
16.30
Trefis
AAL: American Airlines logo
AAL
American Airlines

American Airlines Group (NASDAQ: AAL) is set to release its first quarter operating results before the market opens on Friday, 24th April 2015. During the first quarter, the airline made significant headway in its ongoing integration with US Airways as it consolidated the frequent flier programs of the two airlines and obtained Federal Aviation Administration’s  (FAA’s) approval for a single operating certificate for its operations. However, the Texas-based airline posted disappointing traffic results earlier this month, noting a 1.4% dip in its passenger traffic due to a 0.9% cut in its flying capacity during the quarter [1]. Despite the volatility in the currency market, the analysts estimate American to earn a profit of $1.2 billion or $1.71 per share during the first quarter, almost thrice the profit of 0.59 per share earned a year ago.

We currently have a price estimate of $54 per share, 5% ahead of its current market price.

See our complete analysis for American Airlines Group here

Relevant Articles
  1. Should You Pick American Airlines Stock At $14 After A 6% Fall In A Week?
  2. With 20% Gains This Month Is Alaska Air A Better Pick Than American Airlines Stock?
  3. Which Airlines Stock Will Offer Better Returns – American Or United?
  4. What To Expect From American Airlines’ Q2?
  5. Will American Airlines Stock Recover To Its Pre-Inflation-Shock Level?
  6. Pick Either American Airlines Stock Or Its Peer – Both May Offer Similar Returns

Increased Competition Forces American To Pull Down Capacity

American Airlines’ steady progress in completing the integration with US Airways, coupled with the sluggish oil prices, was expected to drive its earnings in the first quarter. However, the airline faced stiff competition from low-cost carriers such Southwest and Jetblue and smaller airlines like Alaska, as they continue to add capacity at a high rate during the quarter. This created a surplus of seats in the market, forcing large network carriers to cutback capacity to ease out the pricing pressure. The recent capacity pullbacks by Delta reiterate the severity of the pricing pressure faced by the legacy carriers. Consequently, we expect American to follow suit and announce further capacity cutbacks or limited capacity additions. While this may help to ease out the pricing pressure in the market, it may negatively impact the airline’s top-line growth. The market expects American to record consolidated revenue of $9.8 billion, approximately 4% lower on a year-on-year basis.

For the full year, American has reduced its guidance for total system capacity growth to only 2% on a year-on-year basis, as against its previous guidance of 2-3% increase. The full year domestic capacity is expected to increase 2-3%, while the international capacity is expected to grow at around 1% in 2015 [1]. The analysts expect American to earn a net profit of $7.4 billion, or $10.42 per share in 2015, versus a net profit of $2.9 billion earned last year.

Foreign Exchange Losses To Reduce Profits

The airline estimates its mainline jet fuel costs to average at $1.80 to $1.85 per gallon for the first quarter, down from its February forecast of $1.81 to $1.86 per gallon [1]. However, the currency fluctuations are expected to take a toll on American’s unit revenue (amount collected from each passenger per seat for a mile). The airline anticipates its passenger revenue per available seat mile (PRASM), a measure of unit revenue, to decline by 1-3% year-on-year primarily due to the strengthening of the US dollar [1]. Due to the higher-than-expected foreign exchange losses, the airline has lowered the high end of its margin forecast by 1% and now expects to earn an operating margin of 12-13% during the March quarter [1].

In January 2015, American’s Board of Directors authorized a $2 billion share repurchase program to be completed by the end of 2016. As of March 31, 2015, the airline had repurchased 3.8 million shares at a cost of $190 million under this authorization [1]. American also completed a $500 million unsecured bond offering priced at 4.6% and a $1.2 billion enhanced equipment trust certificate (EETC) priced at a blended rate of 3.4% during the quarter. The airline expects to invest over $4 billion on re-fleeting of its aircraft, as the airline expects the delivery of 75 mainline aircraft and plans to retire 103 aircraft during the year [1].

Re-inclusion in the S&P 500 index

The most significant achievement for American Airlines during the first quarter was its re-inclusion into the S&P 500 index. Soon after the announcement, the airline’s stock price soared by almost 7% within a single trading day. American fell out of the S&P 500 during its 2003 financial troubles. However, it jumped back into the benchmark index within 15 months after exiting its bankruptcy proceedings, while it took Delta more than six years to rejoin the index post its bankruptcy. American’s entry into the index is a sign of its financial recovery post its merger with US Airways on 9th December 2013.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. American Announces Traffic Results for March, 10th April 2015, www.aa.com [] [] [] [] [] [] []