American Airlines saw revenue rise from $7.48 billion in Q2 '21 to $13.4 billion in Q2 '22, as Passenger sales recovered over the past year. Despite a 2.5x rise in aircraft fuel charges, operating income grew from $441 million in Q2 '21 to $1.02 billion in Q2 '22, and this helped push net income up. This in turn helped EPS jump from $0.03 in Q2 '21 to $0.73 in Q2 '22.
Below are key drivers for American Airlines that present opportunities for upside or downside to the current Trefis price estimate.
American's Mainline ASM: American's mainline ASM was 158,088 in 2013. However, it rose sharply to 237,522 in 2014 due to the incorporation of full-year results from US Airways. Since then, the figure has gone to increase to about 243,806 in 2017. In 2021, we saw American's mainline ASM to increase to about 214,535 million and expect it to reach over 350,000 through the end of the Trefis forecast period.
However, if American manages to grow its mainline ASM to 370,000+ by the end of the Trefis forecast period, then there could be a potential upside of over 10% to Trefis price estimate for American Airlines Group's stock.
Fuel Costs as a Percentage of Revenues for Mainline Flights: American's fuel costs as a percentage of its passenger revenues for US operations was 38.8% in 2013. However, due to the sharp fall in the global crude oil prices, it fell to less than 35% in 2014. It fell further to 21.4% in 2015 and 18.2% in 2016, due to the sustained decline in crude oil prices. However, in 2017, we saw a slight reversal in the trend as crude oil prices begin to climb again. For 2021, fuel costs came in at 25% of passenger revenue.
If, however, the crude oil prices recover faster-than-expected from their recent fall Mainline operations reaches 30% by the end of the Trefis forecast period, unlike our current estimate of close to 27% it could result in a downside of more than 15% to the Trefis price estimate for American Airlines Group's stock.
American Airlines Group was established on December 9, 2013, after the erstwhile AMR Corporation emerged from bankruptcy through a merger with US Airways. It is currently the largest airline in the world, both in terms of passenger traffic and flying capacity.
American has primary hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York City, Philadelphia, Phoenix, and Washington, D.C. Together with its regional carriers, American operates around 6,700 daily flights to 339 destinations in 54 countries. It operates 983 mainline jets, and its mainline operations are fed by its regional network that is operated under the brand American Eagle.
American is also a founding member of the Oneworld Alliance, which includes AirBerlin, British Airways, Cathay Pacific Airways, Finnair, Iberia, Japan Airlines, LAN Airlines, Malaysia Airlines, Qantas Airways, Qatar Airways, Royal Jordanian, S7 Airlines, SriLankan Airlines, and TAM Airlines.
American has the largest service network in the world. This is attractive to customers, especially frequent fliers, as it enables them to earn miles/benefits on a larger network.
Such an extensive service network also enables American's cargo business, which is one of the largest air cargo operations in the world, with facilities and interline connections available across the globe.
Fuel expenses constitute the single largest cost head - nearly a third of the total operating cost - for all airlines, including American. This makes airlines highly vulnerable to hikes in crude oil prices. As American does not engage in fuel price hedging, it is all the more vulnerable to sudden increases in crude oil prices.
Given the fact that oil prices are on the rise now, we expect the bottom line to be hurt in the coming quarters.
The demand for flights is highly correlated to global economic growth. Thus, a decline in economic growth, or a recession, reduces the demand for flights, which impacts passenger traffic for airlines. On the contrary, steady growth in the global and the US economy grows demand for air travel, allowing airlines to raise their airfares, occupancy rates, and profits.
Many airlines, including American, are figuring out ways to grow their top lines through ancillary heads such as baggage fees, access to onboard WiFi/food/drinks, etc. Accordingly, airlines are investing in enhancing their product offerings that include in-flight WiFi and other entertainment options, improved lounge facilities, and extra-legroom seats.
According to a recent Amadeus/IdeaWorks study, North American airlines collectively produce one of the largest streams of ancillary revenues compared to other regions. A majority of the increase is attributable to stronger merchandising efforts by the carriers as well as the addition of more à la carte services for sale.
The US airline industry has seen many mergers and acquisitions in the last decade, including the five big combinations of US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways.
The consolidation of the industry has resulted in lower competition, particularly through capacity rationalization that follows a merger. Reduced competition, in turn, has allowed airlines to raise airfares more freely, allowing them to grow profits. Going forward, slow overall capacity additions will allow airlines to continue to maintain their load factors (percentage of seats occupied in a flight) and profits.