Here Are The Key Factors That Can Impact American Airlines’ Earnings Growth

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American Airlines (NYSE:AAL), the world’s largest airline by traffic, reported a sharp jump in its earnings in 2015, making it the best year in the history of the airline [1]. The airline witnessed a notable expansion in its net income, largely due to the plummeting fuel costs during the year. In this note, we show how different factors impacted American Airlines’ EPS expansion in 2015.

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Key Factors Impacting American Airlines’ EPS Growth

  • Jet fuel costs account for one-third of an airline’s total operating expenses. Thus, the steep fall in crude oil prices over the last year resulted in significant fuel cost savings for airlines across the globe. American Airlines was among the few airlines who managed to reap the full benefit of the slump in jet fuel prices in 2015, due to its policy of not hedging its fuel consumption. Consequently, the 50% drop in crude oil prices led to over a 40% decline in American’s jet fuel costs, resulting in cost savings of almost $4 billion.
  • Due to these huge fuel cost savings, American Airlines announced its accelerated share repurchase programs during 2015. As a result, the airline repurchased 49.1 million shares and returned close to $4 billion to its shareholders in the form of share buy backs during the year. This reduced the airline’s share count to 668 million, which, in turn, magnified the airline’s earnings growth.
  • However, American’s personnel costs increased by almost 12% due to its integration with US Airways during the year, causing its overall non-fuel costs to go up by 2.7%. This somewhat diluted the impact of lower fuel costs and the share buyback. Yet, the network carrier’s EPS almost tripled to $11.39 per share in 2015.
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Going Forward

Over the last quarter, crude oil prices have shown strong signs of recovery and have improved more than 60% since the beginning of 2016. As a result, American Airlines’ stock has seen a downhill trend in the past few months, losing almost 40% of value since the start of the year. Keeping in mind the current market trends, we expect crude oil prices to gradually recover over the long term. Since American Airlines does not hedge its fuel consumption, we anticipate the airline’s margins to be severely hit by the rebound in oil prices. For 2016, we forecast the airline’s EPS to decline almost 50%, as oil prices recover over the year. That said, the airline has an opportunity to repurchase its own stock at the current low prices through its accelerated share buy back program, and mitigate the effect of higher fuel costs on the EPS in the future.

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Have more questions about American Airlines (NYSE:AAL)? See the following links:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for American Airlines

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Notes:
  1. American Airlines Announces 2015 Results, 29th January 2016, www.aa.com []