Is The Market Pricing American Airlines Fairly?
Of all the air carriers in the U.S., American Airlines (NASDAQ:AAL) is the biggest, in terms of market size. However, like all its competitors, the company suffered a huge blow to operations over the second half of FY 2017. Hurricane Irma and Hurricane Harvey swept across the Eastern seaboard forcing the airline to cancel thousands of flights, while delaying countless others. While this took a toll on the company’s stock price, through its consistent performance, American managed to end the year about $12 higher than the beginning. At present, the stock is trading for about $51. However, according to our estimate of $56, the market has undervalued the stock by almost 10%.
We have created an interactive dashboard analysis to estimate American’s valuation based on its expected revenues for FY 2018. Click on the link to modify the figures to arrive at your own price estimate.
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In general, American derives its revenues from four sources – Mainline, Regional, Cargo, and Other. While Cargo revenues are expected to increase positively, we believe that Mainline, Regional, and Other segments are going to be the primary revenue drivers.
American, like any other airline, primarily derives its revenues from ticket sales. Given the improving condition of the economy, we expect to see a higher number of business and leisure travelers. Increased demand is expected to favor both passenger segments. However, Regional is expected to get a heavier boost on larger expansion plans that include increasing the company’s reach across the continental U.S. Mainline revenues are expected to come in around $29.4 billion, while Regional revenues hit $7.3 billion.
The primary component of Other revenue is fees from reservation changes and excess baggage fees charged to customers. Understandably, this does not account for much of the total sales. However, with increased passenger miles, revenues in the division are bound to increase in a similar proportion. We expect to see Other revenues jump to about $5.4 billion in FY 2018.
As one can see from the calculations above, it’s possible that American’s stock price has room to grow. We could see the stock price increase over the next few quarters.
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