Intrinsic value of American Airlines Group - AAL

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$51.93

  Intrinsic Value

$52.78

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  Rating & Target

hold

+2%

Previous close

$51.93

 
Intrinsic value

$52.78

 
Up/down potential

+2%

 
Rating

hold

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

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 2016), $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 25.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -1.98
  7.20
  6.98
  6.78
  6.60
  6.44
  6.30
  6.17
  6.05
  5.95
  5.85
  5.77
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.19
  5.18
  5.16
  5.14
  5.13
  5.12
  5.10
Revenue, $m
  40,180
  43,073
  46,079
  49,205
  52,454
  55,834
  59,351
  63,012
  66,826
  70,800
  74,943
  79,266
  83,776
  88,485
  93,404
  98,545
  103,918
  109,538
  115,417
  121,569
  128,008
  134,751
  141,813
  149,211
  156,963
  165,086
  173,601
  182,528
  191,888
  201,703
  211,997
Variable operating expenses, $m
 
  36,539
  39,061
  41,683
  44,408
  47,243
  50,194
  53,265
  56,464
  59,797
  63,273
  66,489
  70,273
  74,223
  78,349
  82,661
  87,169
  91,882
  96,814
  101,974
  107,376
  113,032
  118,955
  125,161
  131,663
  138,477
  145,620
  153,108
  160,959
  169,192
  177,827
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
  34,896
  36,539
  39,061
  41,683
  44,408
  47,243
  50,194
  53,265
  56,464
  59,797
  63,273
  66,489
  70,273
  74,223
  78,349
  82,661
  87,169
  91,882
  96,814
  101,974
  107,376
  113,032
  118,955
  125,161
  131,663
  138,477
  145,620
  153,108
  160,959
  169,192
  177,827
Operating income, $m
  5,284
  6,533
  7,018
  7,522
  8,046
  8,590
  9,157
  9,747
  10,362
  11,003
  11,670
  12,776
  13,503
  14,262
  15,055
  15,884
  16,750
  17,656
  18,603
  19,595
  20,633
  21,719
  22,858
  24,050
  25,299
  26,609
  27,981
  29,420
  30,929
  32,511
  34,170
EBITDA, $m
  7,102
  8,668
  9,273
  9,902
  10,555
  11,236
  11,943
  12,680
  13,448
  14,247
  15,081
  15,951
  16,858
  17,806
  18,796
  19,830
  20,912
  22,043
  23,226
  24,464
  25,759
  27,116
  28,537
  30,026
  31,586
  33,221
  34,934
  36,731
  38,614
  40,589
  42,661
Interest expense (income), $m
  867
  855
  766
  881
  1,001
  1,125
  1,254
  1,388
  1,528
  1,674
  1,826
  1,984
  2,149
  2,322
  2,502
  2,690
  2,886
  3,091
  3,306
  3,531
  3,766
  4,012
  4,270
  4,539
  4,822
  5,118
  5,429
  5,754
  6,095
  6,453
  6,828
Earnings before tax, $m
  4,299
  5,679
  6,252
  6,640
  7,045
  7,465
  7,903
  8,359
  8,834
  9,329
  9,844
  10,792
  11,354
  11,940
  12,553
  13,194
  13,864
  14,564
  15,297
  16,064
  16,867
  17,707
  18,588
  19,511
  20,477
  21,490
  22,553
  23,666
  24,834
  26,058
  27,342
Tax expense, $m
  1,623
  1,533
  1,688
  1,793
  1,902
  2,016
  2,134
  2,257
  2,385
  2,519
  2,658
  2,914
  3,066
  3,224
  3,389
  3,562
  3,743
  3,932
  4,130
  4,337
  4,554
  4,781
  5,019
  5,268
  5,529
  5,802
  6,089
  6,390
  6,705
  7,036
  7,382
Net income, $m
  2,676
  4,146
  4,564
  4,848
  5,143
  5,450
  5,769
  6,102
  6,449
  6,810
  7,186
  7,878
  8,288
  8,717
  9,164
  9,632
  10,120
  10,632
  11,167
  11,727
  12,313
  12,926
  13,569
  14,243
  14,948
  15,688
  16,463
  17,276
  18,128
  19,022
  19,960

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  6,359
  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
  51,274
  48,126
  51,485
  54,977
  58,608
  62,384
  66,314
  70,405
  74,666
  79,106
  83,736
  88,565
  93,605
  98,866
  104,363
  110,106
  116,110
  122,389
  128,957
  135,831
  143,026
  150,560
  158,450
  166,716
  175,377
  184,454
  193,968
  203,942
  214,400
  225,367
  236,869
Adjusted assets (=assets-cash), $m
  44,915
  48,126
  51,485
  54,977
  58,608
  62,384
  66,314
  70,405
  74,666
  79,106
  83,736
  88,565
  93,605
  98,866
  104,363
  110,106
  116,110
  122,389
  128,957
  135,831
  143,026
  150,560
  158,450
  166,716
  175,377
  184,454
  193,968
  203,942
  214,400
  225,367
  236,869
Revenue / Adjusted assets
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
  0.895
Average production assets, $m
  31,546
  33,812
  36,172
  38,626
  41,176
  43,830
  46,590
  49,465
  52,458
  55,578
  58,831
  62,223
  65,764
  69,461
  73,323
  77,358
  81,576
  85,987
  90,602
  95,431
  100,487
  105,780
  111,323
  117,131
  123,216
  129,593
  136,277
  143,284
  150,632
  158,337
  166,418
Working capital, $m
  -3,548
  -8,615
  -9,216
  -9,841
  -10,491
  -11,167
  -11,870
  -12,602
  -13,365
  -14,160
  -14,989
  -15,853
  -16,755
  -17,697
  -18,681
  -19,709
  -20,784
  -21,908
  -23,083
  -24,314
  -25,602
  -26,950
  -28,363
  -29,842
  -31,393
  -33,017
  -34,720
  -36,506
  -38,378
  -40,341
  -42,399
Total debt, $m
  24,344
  20,169
  23,192
  26,334
  29,602
  33,001
  36,537
  40,219
  44,054
  48,051
  52,217
  56,563
  61,099
  65,835
  70,781
  75,950
  81,354
  87,005
  92,917
  99,103
  105,579
  112,359
  119,460
  126,900
  134,694
  142,863
  151,426
  160,403
  169,815
  179,685
  190,037
Total liabilities, $m
  47,489
  43,314
  46,337
  49,479
  52,747
  56,146
  59,682
  63,364
  67,199
  71,196
  75,362
  79,708
  84,244
  88,980
  93,926
  99,095
  104,499
  110,150
  116,062
  122,248
  128,724
  135,504
  142,605
  150,045
  157,839
  166,008
  174,571
  183,548
  192,960
  202,830
  213,182
Total equity, $m
  3,785
  4,813
  5,149
  5,498
  5,861
  6,238
  6,631
  7,040
  7,467
  7,911
  8,374
  8,856
  9,360
  9,887
  10,436
  11,011
  11,611
  12,239
  12,896
  13,583
  14,303
  15,056
  15,845
  16,672
  17,538
  18,445
  19,397
  20,394
  21,440
  22,537
  23,687
Total liabilities and equity, $m
  51,274
  48,127
  51,486
  54,977
  58,608
  62,384
  66,313
  70,404
  74,666
  79,107
  83,736
  88,564
  93,604
  98,867
  104,362
  110,106
  116,110
  122,389
  128,958
  135,831
  143,027
  150,560
  158,450
  166,717
  175,377
  184,453
  193,968
  203,942
  214,400
  225,367
  236,869
Debt-to-equity ratio
  6.432
  4.190
  4.500
  4.790
  5.050
  5.290
  5.510
  5.710
  5.900
  6.070
  6.240
  6.390
  6.530
  6.660
  6.780
  6.900
  7.010
  7.110
  7.210
  7.300
  7.380
  7.460
  7.540
  7.610
  7.680
  7.750
  7.810
  7.870
  7.920
  7.970
  8.020
Adjusted equity ratio
  -0.057
  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
  2,676
  4,146
  4,564
  4,848
  5,143
  5,450
  5,769
  6,102
  6,449
  6,810
  7,186
  7,878
  8,288
  8,717
  9,164
  9,632
  10,120
  10,632
  11,167
  11,727
  12,313
  12,926
  13,569
  14,243
  14,948
  15,688
  16,463
  17,276
  18,128
  19,022
  19,960
Depreciation, amort., depletion, $m
  1,818
  2,134
  2,255
  2,380
  2,510
  2,645
  2,786
  2,933
  3,086
  3,245
  3,411
  3,175
  3,355
  3,544
  3,741
  3,947
  4,162
  4,387
  4,623
  4,869
  5,127
  5,397
  5,680
  5,976
  6,287
  6,612
  6,953
  7,310
  7,685
  8,078
  8,491
Funds from operations, $m
  6,792
  6,280
  6,818
  7,227
  7,653
  8,095
  8,555
  9,035
  9,534
  10,055
  10,597
  11,053
  11,644
  12,260
  12,905
  13,578
  14,282
  15,019
  15,789
  16,596
  17,440
  18,323
  19,249
  20,219
  21,235
  22,300
  23,416
  24,587
  25,814
  27,101
  28,450
Change in working capital, $m
  268
  -579
  -601
  -625
  -650
  -676
  -703
  -732
  -763
  -795
  -829
  -864
  -902
  -942
  -984
  -1,028
  -1,075
  -1,124
  -1,176
  -1,230
  -1,288
  -1,349
  -1,412
  -1,480
  -1,550
  -1,625
  -1,703
  -1,785
  -1,872
  -1,963
  -2,059
Cash from operations, $m
  6,524
  6,858
  7,420
  7,852
  8,303
  8,771
  9,259
  9,767
  10,297
  10,849
  11,426
  11,917
  12,546
  13,202
  13,889
  14,606
  15,357
  16,143
  16,965
  17,826
  18,728
  19,672
  20,661
  21,698
  22,785
  23,925
  25,119
  26,372
  27,686
  29,064
  30,509
Maintenance CAPEX, $m
  0
  -1,609
  -1,725
  -1,846
  -1,971
  -2,101
  -2,236
  -2,377
  -2,524
  -2,676
  -2,836
  -3,002
  -3,175
  -3,355
  -3,544
  -3,741
  -3,947
  -4,162
  -4,387
  -4,623
  -4,869
  -5,127
  -5,397
  -5,680
  -5,976
  -6,287
  -6,612
  -6,953
  -7,310
  -7,685
  -8,078
New CAPEX, $m
  -5,731
  -2,267
  -2,360
  -2,453
  -2,551
  -2,653
  -2,761
  -2,874
  -2,994
  -3,120
  -3,253
  -3,393
  -3,541
  -3,697
  -3,861
  -4,035
  -4,218
  -4,411
  -4,615
  -4,829
  -5,055
  -5,293
  -5,544
  -5,807
  -6,085
  -6,377
  -6,684
  -7,008
  -7,348
  -7,705
  -8,081
Cash from investing activities, $m
  -5,698
  -3,876
  -4,085
  -4,299
  -4,522
  -4,754
  -4,997
  -5,251
  -5,518
  -5,796
  -6,089
  -6,395
  -6,716
  -7,052
  -7,405
  -7,776
  -8,165
  -8,573
  -9,002
  -9,452
  -9,924
  -10,420
  -10,941
  -11,487
  -12,061
  -12,664
  -13,296
  -13,961
  -14,658
  -15,390
  -16,159
Free cash flow, $m
  826
  2,982
  3,334
  3,554
  3,781
  4,017
  4,262
  4,516
  4,779
  5,053
  5,338
  5,523
  5,830
  6,150
  6,483
  6,830
  7,192
  7,569
  7,963
  8,374
  8,803
  9,252
  9,721
  10,211
  10,724
  11,261
  11,823
  12,412
  13,028
  13,673
  14,350
Issuance/(repayment) of debt, $m
  3,874
  -2,320
  3,023
  3,143
  3,268
  3,399
  3,537
  3,682
  3,835
  3,996
  4,167
  4,346
  4,536
  4,736
  4,947
  5,169
  5,404
  5,651
  5,912
  6,186
  6,476
  6,780
  7,101
  7,439
  7,795
  8,169
  8,563
  8,977
  9,412
  9,870
  10,352
Issuance/(repurchase) of shares, $m
  -4,500
  1,386
  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  
  -670
  -934
  3,023
  3,143
  3,268
  3,399
  3,537
  3,682
  3,835
  3,996
  4,167
  4,346
  4,536
  4,736
  4,947
  5,169
  5,404
  5,651
  5,912
  6,186
  6,476
  6,780
  7,101
  7,439
  7,795
  8,169
  8,563
  8,977
  9,412
  9,870
  10,352
Total cash flow (excl. dividends), $m
  156
  2,048
  6,358
  6,696
  7,049
  7,416
  7,798
  8,198
  8,614
  9,050
  9,504
  9,869
  10,366
  10,886
  11,430
  11,999
  12,596
  13,220
  13,875
  14,560
  15,279
  16,032
  16,822
  17,650
  18,519
  19,430
  20,386
  21,388
  22,440
  23,544
  24,702
Retained Cash Flow (-), $m
  1,850
  -5,532
  -336
  -349
  -363
  -378
  -393
  -409
  -426
  -444
  -463
  -483
  -504
  -526
  -550
  -574
  -600
  -628
  -657
  -687
  -720
  -753
  -789
  -827
  -866
  -908
  -951
  -997
  -1,046
  -1,097
  -1,150
Prev. year cash balance distribution, $m
 
  4,504
  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
 
  1,020
  6,022
  6,347
  6,686
  7,038
  7,405
  7,789
  8,188
  8,606
  9,041
  9,386
  9,862
  10,360
  10,880
  11,425
  11,995
  12,592
  13,218
  13,873
  14,560
  15,279
  16,033
  16,824
  17,653
  18,522
  19,434
  20,391
  21,394
  22,447
  23,551
Discount rate, %
 
  7.90
  8.30
  8.71
  9.15
  9.60
  10.08
  10.59
  11.12
  11.67
  12.26
  12.87
  13.51
  14.19
  14.90
  15.64
  16.42
  17.24
  18.11
  19.01
  19.96
  20.96
  22.01
  23.11
  24.27
  25.48
  26.75
  28.09
  29.49
  30.97
  32.52
PV of cash for distribution, $m
 
  945
  5,135
  4,940
  4,711
  4,450
  4,161
  3,851
  3,524
  3,186
  2,845
  2,479
  2,155
  1,846
  1,557
  1,292
  1,053
  842
  661
  508
  382
  281
  202
  141
  96
  64
  41
  25
  15
  9
  5
Current shareholders' claim on cash, %
  100
  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 9.8
Price to Sales 0.7
Price to Book 7
Price to Tangible Book
Price to Cash Flow 4
Price to Free Cash Flow 33.2
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 $40180 million for the last fiscal year's total revenue generated by American Airlines Group. The default revenue input number comes from 2016 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 7.2% 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 7.9%, 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 84.9%.

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 3.8% 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 78.5%.

Life of production assets of 19.6 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 -20%. 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 - $3785 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 487.002 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 $25.3 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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Financial statements of AAL
Valuation of Stocks

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