Intrinsic value of American Airlines Group - AAL

Previous Close

$32.04

  Intrinsic Value

$27.21

stock screener

  Rating & Target

hold

-15%

Previous close

$32.04

 
Intrinsic value

$27.21

 
Up/down potential

-15%

 
Rating

hold

We calculate the intrinsic value of AAL stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 15.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  3.70
  3.83
  3.95
  4.05
  4.15
  4.23
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.80
  4.82
  4.84
  4.86
  4.87
  4.88
  4.90
  4.91
  4.92
  4.92
  4.93
  4.94
Revenue, $m
  43,769
  45,445
  47,239
  49,153
  51,191
  53,358
  55,657
  58,094
  60,674
  63,402
  66,284
  69,328
  72,540
  75,927
  79,498
  83,260
  87,223
  91,395
  95,786
  100,407
  105,269
  110,382
  115,760
  121,415
  127,360
  133,609
  140,177
  147,080
  154,334
  161,956
Variable operating expenses, $m
  37,968
  39,398
  40,928
  42,561
  44,300
  46,148
  48,110
  50,189
  52,389
  54,717
  56,546
  59,143
  61,883
  64,773
  67,819
  71,028
  74,408
  77,968
  81,714
  85,656
  89,803
  94,166
  98,754
  103,578
  108,649
  113,980
  119,583
  125,472
  131,660
  138,163
Fixed operating expenses, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  37,968
  39,398
  40,928
  42,561
  44,300
  46,148
  48,110
  50,189
  52,389
  54,717
  56,546
  59,143
  61,883
  64,773
  67,819
  71,028
  74,408
  77,968
  81,714
  85,656
  89,803
  94,166
  98,754
  103,578
  108,649
  113,980
  119,583
  125,472
  131,660
  138,163
Operating income, $m
  5,801
  6,047
  6,311
  6,592
  6,891
  7,210
  7,547
  7,905
  8,284
  8,685
  9,738
  10,185
  10,657
  11,155
  11,679
  12,232
  12,814
  13,427
  14,072
  14,751
  15,465
  16,217
  17,007
  17,837
  18,711
  19,629
  20,594
  21,608
  22,674
  23,793
EBITDA, $m
  8,353
  8,673
  9,016
  9,381
  9,770
  10,183
  10,622
  11,087
  11,580
  12,100
  12,650
  13,231
  13,844
  14,491
  15,172
  15,890
  16,646
  17,443
  18,281
  19,163
  20,091
  21,066
  22,093
  23,172
  24,307
  25,499
  26,753
  28,070
  29,455
  30,909
Interest expense (income), $m
  867
  1,354
  1,120
  1,222
  1,331
  1,447
  1,571
  1,702
  1,842
  1,990
  2,147
  2,313
  2,488
  2,673
  2,868
  3,074
  3,291
  3,519
  3,760
  4,013
  4,280
  4,561
  4,856
  5,167
  5,493
  5,837
  6,198
  6,578
  6,977
  7,396
  7,837
Earnings before tax, $m
  4,447
  4,927
  5,089
  5,261
  5,444
  5,639
  5,845
  6,063
  6,294
  6,538
  7,425
  7,697
  7,984
  8,287
  8,606
  8,941
  9,295
  9,667
  10,059
  10,471
  10,905
  11,360
  11,840
  12,344
  12,874
  13,431
  14,016
  14,631
  15,277
  15,957
Tax expense, $m
  1,201
  1,330
  1,374
  1,420
  1,470
  1,522
  1,578
  1,637
  1,699
  1,765
  2,005
  2,078
  2,156
  2,237
  2,324
  2,414
  2,510
  2,610
  2,716
  2,827
  2,944
  3,067
  3,197
  3,333
  3,476
  3,626
  3,784
  3,950
  4,125
  4,308
Net income, $m
  3,246
  3,597
  3,715
  3,841
  3,974
  4,116
  4,267
  4,426
  4,595
  4,773
  5,420
  5,619
  5,829
  6,049
  6,282
  6,527
  6,785
  7,057
  7,343
  7,644
  7,960
  8,293
  8,643
  9,011
  9,398
  9,804
  10,232
  10,681
  11,153
  11,648

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  54,711
  56,806
  59,048
  61,441
  63,989
  66,697
  69,572
  72,618
  75,842
  79,252
  82,856
  86,660
  90,675
  94,909
  99,372
  104,075
  109,028
  114,243
  119,732
  125,509
  131,586
  137,978
  144,700
  151,769
  159,200
  167,011
  175,221
  183,850
  192,917
  202,445
Adjusted assets (=assets-cash), $m
  54,711
  56,806
  59,048
  61,441
  63,989
  66,697
  69,572
  72,618
  75,842
  79,252
  82,856
  86,660
  90,675
  94,909
  99,372
  104,075
  109,028
  114,243
  119,732
  125,509
  131,586
  137,978
  144,700
  151,769
  159,200
  167,011
  175,221
  183,850
  192,917
  202,445
Revenue / Adjusted assets
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
Average production assets, $m
  37,116
  38,537
  40,058
  41,682
  43,410
  45,248
  47,197
  49,264
  51,451
  53,765
  56,209
  58,790
  61,514
  64,386
  67,414
  70,605
  73,965
  77,503
  81,226
  85,145
  89,268
  93,604
  98,165
  102,960
  108,001
  113,300
  118,870
  124,724
  130,875
  137,339
Working capital, $m
  -9,366
  -9,725
  -10,109
  -10,519
  -10,955
  -11,419
  -11,911
  -12,432
  -12,984
  -13,568
  -14,185
  -14,836
  -15,524
  -16,248
  -17,013
  -17,818
  -18,666
  -19,558
  -20,498
  -21,487
  -22,528
  -23,622
  -24,773
  -25,983
  -27,255
  -28,592
  -29,998
  -31,475
  -33,027
  -34,659
Total debt, $m
  20,740
  22,626
  24,644
  26,797
  29,090
  31,528
  34,114
  36,856
  39,758
  42,827
  46,070
  49,494
  53,108
  56,918
  60,935
  65,168
  69,625
  74,319
  79,259
  84,458
  89,927
  95,680
  101,730
  108,092
  114,780
  121,810
  129,199
  136,965
  145,126
  153,701
Total liabilities, $m
  49,240
  51,126
  53,144
  55,297
  57,590
  60,028
  62,614
  65,356
  68,258
  71,327
  74,570
  77,994
  81,608
  85,418
  89,435
  93,668
  98,125
  102,819
  107,759
  112,958
  118,427
  124,180
  130,230
  136,592
  143,280
  150,310
  157,699
  165,465
  173,626
  182,201
Total equity, $m
  5,471
  5,681
  5,905
  6,144
  6,399
  6,670
  6,957
  7,262
  7,584
  7,925
  8,286
  8,666
  9,068
  9,491
  9,937
  10,408
  10,903
  11,424
  11,973
  12,551
  13,159
  13,798
  14,470
  15,177
  15,920
  16,701
  17,522
  18,385
  19,292
  20,245
Total liabilities and equity, $m
  54,711
  56,807
  59,049
  61,441
  63,989
  66,698
  69,571
  72,618
  75,842
  79,252
  82,856
  86,660
  90,676
  94,909
  99,372
  104,076
  109,028
  114,243
  119,732
  125,509
  131,586
  137,978
  144,700
  151,769
  159,200
  167,011
  175,221
  183,850
  192,918
  202,446
Debt-to-equity ratio
  3.790
  3.980
  4.170
  4.360
  4.550
  4.730
  4.900
  5.080
  5.240
  5.400
  5.560
  5.710
  5.860
  6.000
  6.130
  6.260
  6.390
  6.510
  6.620
  6.730
  6.830
  6.930
  7.030
  7.120
  7.210
  7.290
  7.370
  7.450
  7.520
  7.590
Adjusted equity ratio
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,246
  3,597
  3,715
  3,841
  3,974
  4,116
  4,267
  4,426
  4,595
  4,773
  5,420
  5,619
  5,829
  6,049
  6,282
  6,527
  6,785
  7,057
  7,343
  7,644
  7,960
  8,293
  8,643
  9,011
  9,398
  9,804
  10,232
  10,681
  11,153
  11,648
Depreciation, amort., depletion, $m
  2,552
  2,626
  2,705
  2,789
  2,879
  2,974
  3,075
  3,182
  3,295
  3,415
  2,912
  3,046
  3,187
  3,336
  3,493
  3,658
  3,832
  4,016
  4,209
  4,412
  4,625
  4,850
  5,086
  5,335
  5,596
  5,870
  6,159
  6,462
  6,781
  7,116
Funds from operations, $m
  5,799
  6,223
  6,420
  6,630
  6,853
  7,090
  7,342
  7,608
  7,890
  8,188
  8,333
  8,665
  9,016
  9,385
  9,775
  10,186
  10,618
  11,073
  11,552
  12,056
  12,586
  13,143
  13,729
  14,346
  14,994
  15,675
  16,391
  17,143
  17,934
  18,764
Change in working capital, $m
  -334
  -359
  -384
  -410
  -436
  -464
  -492
  -521
  -552
  -584
  -617
  -651
  -687
  -725
  -764
  -805
  -848
  -893
  -940
  -989
  -1,040
  -1,094
  -1,151
  -1,210
  -1,272
  -1,337
  -1,406
  -1,477
  -1,552
  -1,631
Cash from operations, $m
  6,133
  6,582
  6,804
  7,039
  7,289
  7,554
  7,834
  8,129
  8,442
  8,772
  8,950
  9,317
  9,703
  10,110
  10,539
  10,991
  11,466
  11,966
  12,491
  13,044
  13,626
  14,237
  14,880
  15,556
  16,266
  17,012
  17,796
  18,620
  19,486
  20,395
Maintenance CAPEX, $m
  -1,855
  -1,923
  -1,997
  -2,076
  -2,160
  -2,249
  -2,344
  -2,445
  -2,553
  -2,666
  -2,786
  -2,912
  -3,046
  -3,187
  -3,336
  -3,493
  -3,658
  -3,832
  -4,016
  -4,209
  -4,412
  -4,625
  -4,850
  -5,086
  -5,335
  -5,596
  -5,870
  -6,159
  -6,462
  -6,781
New CAPEX, $m
  -1,319
  -1,422
  -1,521
  -1,623
  -1,729
  -1,837
  -1,950
  -2,066
  -2,188
  -2,313
  -2,445
  -2,581
  -2,724
  -2,872
  -3,028
  -3,190
  -3,360
  -3,538
  -3,724
  -3,919
  -4,123
  -4,336
  -4,560
  -4,795
  -5,041
  -5,299
  -5,570
  -5,854
  -6,151
  -6,464
Cash from investing activities, $m
  -3,174
  -3,345
  -3,518
  -3,699
  -3,889
  -4,086
  -4,294
  -4,511
  -4,741
  -4,979
  -5,231
  -5,493
  -5,770
  -6,059
  -6,364
  -6,683
  -7,018
  -7,370
  -7,740
  -8,128
  -8,535
  -8,961
  -9,410
  -9,881
  -10,376
  -10,895
  -11,440
  -12,013
  -12,613
  -13,245
Free cash flow, $m
  2,960
  3,237
  3,286
  3,340
  3,401
  3,467
  3,539
  3,618
  3,702
  3,793
  3,720
  3,823
  3,933
  4,051
  4,175
  4,307
  4,447
  4,595
  4,752
  4,917
  5,092
  5,276
  5,470
  5,674
  5,890
  6,117
  6,356
  6,608
  6,872
  7,151
Issuance/(repayment) of debt, $m
  -4,325
  1,886
  2,018
  2,154
  2,293
  2,437
  2,587
  2,741
  2,902
  3,069
  3,243
  3,424
  3,613
  3,811
  4,017
  4,232
  4,458
  4,694
  4,940
  5,199
  5,469
  5,753
  6,050
  6,361
  6,688
  7,030
  7,389
  7,766
  8,161
  8,575
Issuance/(repurchase) of shares, $m
  3,005
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,320
  1,886
  2,018
  2,154
  2,293
  2,437
  2,587
  2,741
  2,902
  3,069
  3,243
  3,424
  3,613
  3,811
  4,017
  4,232
  4,458
  4,694
  4,940
  5,199
  5,469
  5,753
  6,050
  6,361
  6,688
  7,030
  7,389
  7,766
  8,161
  8,575
Total cash flow (excl. dividends), $m
  1,639
  5,123
  5,304
  5,494
  5,694
  5,905
  6,126
  6,359
  6,604
  6,862
  6,963
  7,247
  7,547
  7,861
  8,192
  8,540
  8,905
  9,289
  9,692
  10,116
  10,561
  11,029
  11,520
  12,036
  12,578
  13,147
  13,745
  14,373
  15,033
  15,726
Retained Cash Flow (-), $m
  -6,251
  -210
  -224
  -239
  -255
  -271
  -287
  -305
  -322
  -341
  -360
  -380
  -401
  -423
  -446
  -470
  -495
  -522
  -549
  -578
  -608
  -639
  -672
  -707
  -743
  -781
  -821
  -863
  -907
  -953
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  -4,612
  4,913
  5,080
  5,255
  5,439
  5,634
  5,839
  6,054
  6,282
  6,521
  6,602
  6,867
  7,145
  7,438
  7,746
  8,069
  8,410
  8,767
  9,143
  9,538
  9,953
  10,389
  10,848
  11,329
  11,835
  12,366
  12,924
  13,510
  14,126
  14,773
Discount rate, %
  10.30
  10.82
  11.36
  11.92
  12.52
  13.15
  13.80
  14.49
  15.22
  15.98
  16.78
  17.62
  18.50
  19.42
  20.39
  21.41
  22.48
  23.61
  24.79
  26.03
  27.33
  28.70
  30.13
  31.64
  33.22
  34.88
  36.62
  38.45
  40.38
  42.40
PV of cash for distribution, $m
  -4,181
  4,001
  3,679
  3,349
  3,016
  2,685
  2,362
  2,050
  1,755
  1,481
  1,199
  980
  787
  620
  479
  362
  268
  193
  136
  93
  62
  40
  25
  15
  9
  5
  3
  1
  1
  0
Current shareholders' claim on cash, %
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0

American Airlines Group Inc. is a holding company. The Company's primary business activity is the operation of a network air carrier, providing scheduled air transportation for passengers and cargo. The Company operates through American segment, which provides air transportation for passengers and cargo. The Company's cargo division provides a range of freight and mail services with facilities and interline connections available across the globe. Together with its regional airline subsidiaries and third-party regional carriers operating as American Eagle, its airline operated an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries, principally from its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, District of Columbia, as of December 31, 2016. In the fiscal year ended December 31, 2016, approximately 199 million passengers boarded its mainline and regional flights.

FINANCIAL RATIOS  of  American Airlines Group (AAL)

Valuation Ratios
P/E Ratio 6.1
Price to Sales 0.4
Price to Book 4.3
Price to Tangible Book
Price to Cash Flow 2.5
Price to Free Cash Flow 20.5
Growth Rates
Sales Growth Rate -2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -6.8%
Cap. Spend. - 3 Yr. Gr. Rate 13%
Financial Strength
Quick Ratio 3
Current Ratio 0
LT Debt to Equity 594.2%
Total Debt to Equity 643.2%
Interest Coverage 6
Management Effectiveness
Return On Assets 6.5%
Ret/ On Assets - 3 Yr. Avg. 11.4%
Return On Total Capital 9.8%
Ret/ On T. Cap. - 3 Yr. Avg. 19%
Return On Equity 56.8%
Return On Equity - 3 Yr. Avg. -185.4%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 61.9%
Gross Margin - 3 Yr. Avg. 57.3%
EBITDA Margin 17.4%
EBITDA Margin - 3 Yr. Avg. 15.8%
Operating Margin 13.2%
Oper. Margin - 3 Yr. Avg. 12.7%
Pre-Tax Margin 10.7%
Pre-Tax Margin - 3 Yr. Avg. 9.8%
Net Profit Margin 6.7%
Net Profit Margin - 3 Yr. Avg. 10.7%
Effective Tax Rate 37.8%
Eff/ Tax Rate - 3 Yr. Avg. -5.6%
Payout Ratio 8.4%

AAL stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AAL stock intrinsic value calculation we used $42207 million for the last fiscal year's total revenue generated by American Airlines Group. The default revenue input number comes from 0001 income statement of American Airlines Group. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AAL stock valuation model: a) initial revenue growth rate of 3.7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 10.3%, whose default value for AAL is calculated based on our internal credit rating of American Airlines Group, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of American Airlines Group.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AAL stock the variable cost ratio is equal to 86.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for AAL stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for American Airlines Group.

Corporate tax rate of 27% is the nominal tax rate for American Airlines Group. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AAL stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AAL are equal to 84.8%.

Life of production assets of 19.3 years is the average useful life of capital assets used in American Airlines Group operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AAL is equal to -21.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $-780 million for American Airlines Group - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 468.153 million for American Airlines Group is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of American Airlines Group at the current share price and the inputted number of shares is $15.0 billion.

Management's discussion and analysis

Together with our wholly-owned regional airline subsidiaries and third-party regional carriers operating as American Eagle, our airline operates an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries, principally from our hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. In 2016, approximately 199 million passengers boarded our mainline and regional flights.

We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation, to building the best employee relations in the industry and to providing returns for our stockholders. In January 2017, we were named the 2017 Airline of the Year by Air Transport World, which cited the integration work related to the Merger, our operational and customer service improvements and the investments we are making in our product.

Operational Highlights

During 2016, we made significant investments related to our integration and to continue to improve our product offerings and operational performance.

Integration Accomplishments

   

Integrated all mainline pilots and our mainline fleet into a single scheduling system, allowing us to schedule pilots and aircraft seamlessly across the network regardless of which pre-Merger airline they came from

   

Reached interim agreements with the TWU-IAM that allows our mainline mechanics and ramp personnel to be able to work together and be cross-utilized. Additionally, we ratified five-year JCBAs for dispatchers, flight crew training instructors, simulator pilot instructors and flight simulator engineers

   

Completed the painting of all US Airways mainline aircraft in the American livery. Repainting of former US Airways Express regional jets is expected to be finished in mid-2017

Investments in Our Product and Operations

   

Invested approximately $4.4 billion in new aircraft, including 55 new mainline and 42 new regional aircraft. As a result of our ongoing fleet renewal program, we have the youngest fleet of the major U.S. network carriers

   

Hired additional personnel and invested in new equipment and technology to support our operations. In the fourth quarter of 2016, we achieved our best monthly completion factor, on-time performance, and baggage handling performance since the Merger

   

Redesigned our AAdvantage® loyalty program to award mileage credits based on the price of tickets purchased, enabling elite members to earn even more miles based on their status level. During 2016, the AAdvantage® program was named Best Elite Program in the Americas by the Freddie Awards

   

Introduced Premium Economy, a new class of service on international flights with more legroom, wider seats, and enhanced meal service and amenity kits

   

Made several other customer experience improvements including the reintroduction of free snacks in the main cabin, the launch of complimentary in-flight entertainment and the redesign and upgrade of many Admirals Club lounges

Financial Overview

The U.S. Airline Industry

In 2016, the U.S. airline industry benefited from lower fuel prices. However, the reductions in fuel costs were offset by year-over-year declines in revenue. Both domestic and international markets were impacted by competitive capacity growth. International markets were also impacted by macroeconomic softness and foreign currency weakness.

Jet fuel prices closely follow the price of Brent crude oil. On average, the price of Brent crude oil per barrel was approximately 17% lower in 2016 as compared to 2015. The average daily spot price for Brent crude oil during 2016 was $44 per barrel as compared to an average daily spot price of $52 per barrel during 2015. On a daily basis, Brent crude oil prices fluctuated during 2016 between a high of $55 per barrel to a low of $26 per barrel, and closed the year on December 31, 2016 at $55 per barrel.

While jet fuel prices have declined year-over-year as described above, uncertainty exists regarding the economic conditions driving these declines. See Part I, Item 1A. Risk Factors – “Downturns in economic conditions could adversely affect our business”and “Our business is very dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.”

AAG’s 2016 Results

The selected financial data presented below is derived from AAG’s audited consolidated financial statements included in Part II, Item 8A of this report and should be read in conjunction with those financial statements and the related notes thereto.

                                 
    Year Ended
December 31,
    Increase
(Decrease)
    Percent
Increase 
(Decrease)
 
    2016     2015      
    (In millions, except percentage changes)  

Mainline and regional passenger revenues

  $ 34,579     $ 35,512     $ (933     (2.6

Cargo and other operating revenues

    5,601       5,478       123       2.3  

Total operating revenues

    40,180       40,990       (810     (2.0

Mainline and regional aircraft fuel and related taxes

    6,180       7,456       (1,276     (17.1

Salaries, wages and benefits

    10,890       9,524       1,366       14.4  

Total operating expenses

    34,896       34,786       110       0.3  

Operating income

    5,284       6,204       (920     (14.8

Pre-tax income

    4,299       4,616       (317     (6.9

Income tax provision (benefit)

    1,623       (2,994     4,617       nm  

Net income

    2,676       7,610       (4,934     (64.8
         

Pre-tax income

  $ 4,299     $ 4,616     $ (317     (6.9

Adjusted for: Total pre-tax special items (1)

    772       1,674       (902     (53.9
                                   

Pre-tax income excluding special items

  $ 5,071     $ 6,290     $ (1,219     (19.4
                                   

Results of Operations – 2016 Compared to 2015

We realized net income of $2.7 billion in 2016. This compares to $7.6 billion of net income in 2015, which included a special $3.0 billion non-cash tax benefit as we reversed the valuation allowance on our deferred tax assets, which include our federal and state NOLs. As a result of the reversal of the valuation allowance, we recorded a $1.6 billion provision for income taxes in 2016, which is substantially non-cash due to the utilization of NOLs. Accordingly, amounts reported in 2016 for income tax provision and net income are not comparable to 2015.

We realized pre-tax income of $4.3 billion and $4.6 billion in 2016 and 2015, respectively. Excluding the effects of pre-tax net special items, pre-tax income was $5.1 billion and $6.3 billion in 2016 and 2015, respectively. For reconciliation of pre-tax and net income excluding special items to their comparable measures on a GAAP basis, see Part II, Item 6. Selected Consolidated Financial Data –“Reconciliation of GAAP to Non-GAAP Financial Measures.

Our 2016 pre-tax results on both a GAAP basis and excluding pre-tax net special items were impacted by a decline in revenues due to lower yields. Salaries, wages and benefits costs were higher in 2016, driven by our new labor contracts and the addition of an employee profit sharing program; however, these increases were substantially offset by a year-over-year decline in fuel costs.

Total operating revenues in 2016 decreased $810 million, or 2.0%, from 2015 driven by lower passenger revenues offset in part by higher other revenue. Our mainline and regional TRASM was 14.70 cents in 2016, a 3.7% decrease as compared to 15.25 cents in 2015.

Total passenger revenues declined $933 million, or 2.6%, in 2016 from 2015 driven by a 2.8% decrease in yield due to competitive capacity growth, macroeconomic softness outside of the United States and foreign currency weakness.

Cargo revenue decreased $60 million, or 7.9%, in 2016 from 2015 driven primarily by a decrease in domestic and international freight yields.

Other revenue primarily includes revenue associated with our loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. Other revenue increased $183 million, or 3.9%, in 2016 from 2015 driven by an increase in loyalty program revenue. In 2016 and 2015, other revenues associated with our loyalty program were $2.1 billion and $1.9 billion, respectively, of which $1.9 billion and $1.7 billion, respectively, related to the marketing component of mileage sales and other marketing related payments. This year-over-year increase was due to our new co-branded credit card agreements which became effective in the third quarter of 2016. See Note 1(i) to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information on the loyalty program.

Total operating expenses were $34.9 billion in 2016, an increase of $110 million, or 0.3%, from 2015. The increase in operating expenses was due to higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program; however, these costs were substantially offset by a year-over-year decline in fuel costs. See detailed explanations below relating to changes in mainline operating costs per ASM.

[Source: Form 10-K dated 2017-02-22]

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