How Did American Airlines Perform In Q1?

On paper, American Airlines (NASDAQ:AAL) posted a rather impressive quarter. The company was easily able to surpass the earnings and revenue consensus estimates, recording positive year over year growths. Despite this, shares tumbled post the call as higher fuel expenses forced the airline to trim its profit expectations for the year by a huge margin. The company now expects earnings to lie in the range of $5-$6, as opposed to the $5.50-$6.50 range anticipated earlier. As one can see, unlike its competitors, the company believes fuel costs are going to affect the company’s financials quite adversely through 2018.

That said, we believe that the company is quite undervalued at the moment. In this respect, we have created an interactive dashboard to help us explain our reasoning behind this. Please click on the link to make changes to the key drivers and arrive at your own price estimate.

• As mentioned above, heavy increases in fuel prices are expected to hurt earnings through the year quite significantly. Earnings in Q1 fell by nearly 45% to $186 million, or about 39 cents per share, down from $340 million, or 67 cents a share in the year ago period. Despite replacing a number of its gas guzzling, outdated planes with more fuel efficient jets over the last few years, fuel spending at American still jumped by a massive 26%, coming in at $2.10, up from $1.70 a year ago.
• Additionally, ticket prices are expected to see an upward tick for two main reasons through the year. First, rising fuel prices tend to push ticket prices higher as airlines struggle to maintain margins. Second, as mentioned in earlier articles, the company is ready to increase capacity in an effort to capture more of the market. Both these factors are expected to lead to pricing pressures that could see customers paying more for the average flight ticket.
• Despite this, we believe fares won’t rise fast enough to have much of an effect on travel demand, which has been extremely strong so far. In the quarter, the company managed to report a strong 3.5% increase in the TRASM figure from a year ago. This figure was nudged upward thanks to strong demand in international markets, improved premium cabin performance, and the favorable timing of the Easter holidays. We expect to see similar growth in the key metric through the remainder of the year.
• Lastly, during the quarter, American returned over $498 million to investors through dividends and share buybacks. In addition, the airline also declared a dividend of about 10 cents per share, which is likely to be paid out to shareholders on May 8.

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