What Does The Future Look Like At American Airlines?

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

American Airlines, along with all other airlines, has benefited hugely from the low oil prices. The low cost environment has enabled the carrier to refurbish, upgauge, and add more capacity to its fleet. While refurbishing has helped the company provide its clients a more convenient and comfortable flying experience, fleet replacement has reduced its expenditure on depreciation and helped save fuel costs. Furthermore, the company has been able to pare down its debt from record highs, owing to the profits it has made after the decline of oil.

In the following article, we talk about what American Airline’s future holds.

Visa Fee Waiver In Brazil

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

The Brazilian economy has been under a recession since 2014, coupled with a political clout which has left the economy handicapped. American Airlines, the largest U.S. airline in Brazil, has suffered a major hit in the area due to the recession. Only 575,800 Americans visited Brazil in 2015, that is less than 10% of total visitors to Brazil, despite its proximity to the U.S. This led to the carrier pulling out of many second tier cities of the country.

However, of late, the Brazilian government is trying to give a boost to the country’s tourism. The recently concluded Summer Olympics put Brazil back on the world map, with interest in tourism reviving again. To propel tourism further, Brazil introduced a visa waiver for visitors from Australia, Canada, Japan and the U.S. The removal of a visa fee is expected to make Brazil a more attractive destination for travelers. The waiver will eliminate the $160 visa fee U.S citizens had to pay previously to obtain a Brazilian visa. But, the waiver will be on a 12 month trial period, dependent on reciprocation from the partner countries.

The increased tourism is likely to impact American Airlines’ operations in Brazil positively, albeit the routes to second tier cities will be slow to see reinstatement. The reinstatement of these routes is mainly dependent on America’s reciprocation. If the U.S. removes the visa fee too, we could see more people from Brazil flying from these second tier cities to the U.S. Another factor that could help American Airlines are the strengthening of the Brazilian Real against the U.S Dollar.

U.S. Dollar Vs. Brazillian Real (Jan’16-Dec’16)
01121

Warren Buffet’s Investment

Since the slump of oil in late 2014, American airlines have looked extremely attractive. The savings from fuel helped the carriers recoup their losses, upgrade their fleets, and pay their debts. Furthermore, increased profitability allowed carriers to offer cheaper fares, pushing the demand for air travel higher. As the size of the global middle class expands and the air travel demand nearly doubles over the next 20 years (according to the International Air Transport Association (IATA)), we can expect the airlines to continue to perform positively.

However, a slight uncertainty may come from the President-elect Trump’s policy changes focused towards the sector. If he decides to follow through with a travel ban from certain areas, travel might suffer.  However, since being elected, President Trump has also committed up to $1 trillion towards infrastructure spending. Given this scenario, the investment by Warren Buffet’s firm, Berkshire Holdings, in the aviation sector comes as no surprise. It now holds a position in four of the biggest airlines, with that in American Airlines the largest. The investment has already led to a substantial gain in the stock prices of these companies.

01122

Operations In Latin America

We earlier wrote about how a restoration of U.S. relationships with Mexico and Cuba will positively impact the U.S. airlines by increasing traffic, and thus demand. American was one of the first airlines, after JetBlue, to get permission from the U.S. government for approval to fly to and from Cuba and Mexico. It launched its first flight to Cuba from Miami International Airport on 7th September to Santa Clara, and from Los Angeles to Mexico on 4th November. Recently, it also got a nod of approval from the U.S. Department of Transportation and Cuba’s Civil Aviation Institute to fly to Havana. The first flight by American to Havana in more than 50 years took off days ago. As already seen in the company’s third quarter results, reinstatement of flights to the two Latin American nations has contributed positively towards the carrier’s unit revenues and helped in partially dissipating the negative headwinds being seen in passenger yields. Going forward, this could prove to be an even bigger market for the company.

Steps Towards Renewable Fuel

American Airlines recently hired Ocean Park, a boutique investment bank with expertise in the renewable fuels industry, to develop its renewable jet fuel strategy. The development comes in the wake of the biggest ever contract signed by JetBlue to buy biofuel, with its first delivery of 33 million gallons of blended jet fuel coming in 2019. Through Ocean Park’s expertise, American hopes to find ways to buy commercially viable alternative fuel, whose price is comparable to that of traditional jet fuel. The move can be viewed as a step towards International Civil Aviation Organization’s (ICAO) goal for international aviation to achieve carbon-neutral growth from 2020 onward.

World Production of HEFA fuels

20097

Rise In Oil Prices

The last few days have been quite eventful for the commodity markets, particularly crude oil, as the anticipation of a production quota by the Organization of Petroleum Exporting Countries (OPEC) caused oil prices to move rapidly in the last week. The world’s largest cartel finally reached an understanding to cap their combined oil production between 32.5, and a further 0.6 million barrels per day, marking its first coordinated production quota in the last eight years. The additional 0.6 billion barrel per day cut comes from inclusion of Russia, which has committed to cut its production by 0.3 barrels per day. The outcome of the OPEC meeting prompted the global benchmark of crude oil prices – Brent – to jump by 9%.

01123

If the rise in oil prices is sustained, we can see the fuel costs at airlines going up. This, for American Airlines, may result in a paring of the profits it has been able to accumulate over the period of the last two years. Consequently, it may see a deterioration in its margins.

 

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

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research