Expect A Muted Quarter From American Airlines As Revenue Growth Slows

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AAL
American Airlines

American Airlines (NASDAQ:AAL) is expected to report earnings on January 24th.  We expect the company to do relatively well for the quarter, with moderate increases in fuel prices, and per gallon cost of fuel expected to come in between $2.22 – $2.27 for the quarter. This is compared to $1.91 for the previous quarter. With strong consumer demand American Airlines may well see a 2-3% percent rise in Revenue Per Average Seat Mile (RASM). But with increasing costs, the key concern that remains is pre-tax margin; which is expected to come in lower on the back of increased costs.

We currently have a price estimate of $39 per share, which is 20% higher than the market price. You can use our interactive dashboard American Airlines Q4 2018 to modify key drivers and visualize the impact on American Airlines’ price estimate.

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Overall, American Airlines has been grappling with efficiency issues, and large amounts of debt on its balance sheet, which will weight on the airline’s cash flow. The company did cut guidance for the quarter, leading to a stock sell off in December. The forward P/E currently stands at 5.5, a figure that is below historical trends. The airline did continue to add capacity through the quarter and, this may potentially help shore up earnings. Alternatively, the airline has seen a fall in fares for the quarter, and this is further expected to weigh on earnings.

While we do expect a slow quarter, the airline is well placed in terms of valuation, with the stock trading at historically low price to earnings, although the near term outlook is somewhat uncertain. Should the company continue to see earnings rise, we would expect the stock to benefit.

 

 

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