Intrinsic value of American Airlines Group - AAL

Previous Close

$37.79

  Intrinsic Value

$68.36

stock screener

  Rating & Target

str. buy

+81%

Previous close

$37.79

 
Intrinsic value

$68.36

 
Up/down potential

+81%

 
Rating

str. buy

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 2017), $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 18.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
Revenue, $m
  44,317
  46,533
  48,860
  51,303
  53,868
  56,561
  59,389
  62,359
  65,477
  68,751
  72,188
  75,798
  79,588
  83,567
  87,745
  92,133
  96,739
  101,576
  106,655
  111,988
  117,587
  123,466
  129,640
  136,122
  142,928
  150,074
  157,578
  165,457
  173,730
  182,416
Variable operating expenses, $m
  38,436
  40,326
  42,311
  44,395
  46,584
  48,881
  51,294
  53,827
  56,487
  59,280
  61,583
  64,662
  67,895
  71,290
  74,854
  78,597
  82,527
  86,653
  90,986
  95,535
  100,312
  105,328
  110,594
  116,124
  121,930
  128,027
  134,428
  141,149
  148,207
  155,617
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
  38,436
  40,326
  42,311
  44,395
  46,584
  48,881
  51,294
  53,827
  56,487
  59,280
  61,583
  64,662
  67,895
  71,290
  74,854
  78,597
  82,527
  86,653
  90,986
  95,535
  100,312
  105,328
  110,594
  116,124
  121,930
  128,027
  134,428
  141,149
  148,207
  155,617
Operating income, $m
  5,881
  6,207
  6,549
  6,908
  7,284
  7,680
  8,096
  8,532
  8,990
  9,471
  10,605
  11,136
  11,692
  12,277
  12,891
  13,535
  14,212
  14,923
  15,669
  16,452
  17,275
  18,139
  19,046
  19,998
  20,998
  22,048
  23,150
  24,308
  25,523
  26,799
EBITDA, $m
  10,601
  11,131
  11,688
  12,272
  12,886
  13,530
  14,207
  14,917
  15,663
  16,446
  17,268
  18,132
  19,038
  19,990
  20,990
  22,039
  23,141
  24,298
  25,513
  26,789
  28,128
  29,535
  31,011
  32,562
  34,190
  35,900
  37,695
  39,579
  41,558
  43,636
Interest expense (income), $m
  867
  1,354
  1,414
  1,545
  1,682
  1,827
  1,979
  2,138
  2,306
  2,482
  2,666
  2,860
  3,063
  3,277
  3,501
  3,737
  3,984
  4,244
  4,517
  4,803
  5,104
  5,419
  5,751
  6,099
  6,464
  6,848
  7,251
  7,674
  8,118
  8,585
  9,074
Earnings before tax, $m
  4,528
  4,793
  5,004
  5,225
  5,457
  5,701
  5,957
  6,226
  6,508
  6,805
  7,745
  8,072
  8,415
  8,776
  9,154
  9,551
  9,968
  10,406
  10,866
  11,349
  11,856
  12,388
  12,947
  13,534
  14,150
  14,797
  15,476
  16,190
  16,938
  17,725
Tax expense, $m
  1,223
  1,294
  1,351
  1,411
  1,474
  1,539
  1,608
  1,681
  1,757
  1,837
  2,091
  2,179
  2,272
  2,369
  2,472
  2,579
  2,691
  2,810
  2,934
  3,064
  3,201
  3,345
  3,496
  3,654
  3,820
  3,995
  4,179
  4,371
  4,573
  4,786
Net income, $m
  3,305
  3,499
  3,653
  3,814
  3,984
  4,162
  4,349
  4,545
  4,751
  4,968
  5,654
  5,893
  6,143
  6,406
  6,682
  6,972
  7,277
  7,596
  7,932
  8,285
  8,655
  9,043
  9,451
  9,880
  10,329
  10,802
  11,298
  11,818
  12,365
  12,939

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
  53,980
  56,679
  59,513
  62,488
  65,613
  68,893
  72,338
  75,955
  79,753
  83,740
  87,927
  92,324
  96,940
  101,787
  106,876
  112,220
  117,831
  123,723
  129,909
  136,404
  143,224
  150,385
  157,905
  165,800
  174,090
  182,794
  191,934
  201,531
  211,607
  222,188
Adjusted assets (=assets-cash), $m
  53,980
  56,679
  59,513
  62,488
  65,613
  68,893
  72,338
  75,955
  79,753
  83,740
  87,927
  92,324
  96,940
  101,787
  106,876
  112,220
  117,831
  123,723
  129,909
  136,404
  143,224
  150,385
  157,905
  165,800
  174,090
  182,794
  191,934
  201,531
  211,607
  222,188
Revenue / Adjusted assets
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
  0.821
Average production assets, $m
  40,905
  42,950
  45,098
  47,353
  49,720
  52,206
  54,816
  57,557
  60,435
  63,457
  66,630
  69,961
  73,459
  77,132
  80,989
  85,038
  89,290
  93,755
  98,443
  103,365
  108,533
  113,960
  119,658
  125,640
  131,922
  138,519
  145,444
  152,717
  160,353
  168,370
Working capital, $m
  -355
  -372
  -391
  -410
  -431
  -452
  -475
  -499
  -524
  -550
  -578
  -606
  -637
  -669
  -702
  -737
  -774
  -813
  -853
  -896
  -941
  -988
  -1,037
  -1,089
  -1,143
  -1,201
  -1,261
  -1,324
  -1,390
  -1,459
Total debt, $m
  26,177
  28,606
  31,156
  33,834
  36,646
  39,599
  42,699
  45,954
  49,372
  52,961
  56,730
  60,686
  64,841
  69,203
  73,784
  78,593
  83,643
  88,945
  94,513
  100,359
  106,497
  112,942
  119,709
  126,815
  134,276
  142,110
  150,336
  158,973
  168,042
  177,564
Total liabilities, $m
  48,582
  51,011
  53,561
  56,239
  59,051
  62,004
  65,104
  68,359
  71,777
  75,366
  79,135
  83,091
  87,246
  91,608
  96,189
  100,998
  106,048
  111,350
  116,918
  122,764
  128,902
  135,347
  142,114
  149,220
  156,681
  164,515
  172,741
  181,378
  190,447
  199,969
Total equity, $m
  5,398
  5,668
  5,951
  6,249
  6,561
  6,889
  7,234
  7,595
  7,975
  8,374
  8,793
  9,232
  9,694
  10,179
  10,688
  11,222
  11,783
  12,372
  12,991
  13,640
  14,322
  15,039
  15,790
  16,580
  17,409
  18,279
  19,193
  20,153
  21,161
  22,219
Total liabilities and equity, $m
  53,980
  56,679
  59,512
  62,488
  65,612
  68,893
  72,338
  75,954
  79,752
  83,740
  87,928
  92,323
  96,940
  101,787
  106,877
  112,220
  117,831
  123,722
  129,909
  136,404
  143,224
  150,386
  157,904
  165,800
  174,090
  182,794
  191,934
  201,531
  211,608
  222,188
Debt-to-equity ratio
  4.850
  5.050
  5.240
  5.410
  5.590
  5.750
  5.900
  6.050
  6.190
  6.320
  6.450
  6.570
  6.690
  6.800
  6.900
  7.000
  7.100
  7.190
  7.280
  7.360
  7.440
  7.510
  7.580
  7.650
  7.710
  7.770
  7.830
  7.890
  7.940
  7.990
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
  3,305
  3,499
  3,653
  3,814
  3,984
  4,162
  4,349
  4,545
  4,751
  4,968
  5,654
  5,893
  6,143
  6,406
  6,682
  6,972
  7,277
  7,596
  7,932
  8,285
  8,655
  9,043
  9,451
  9,880
  10,329
  10,802
  11,298
  11,818
  12,365
  12,939
Depreciation, amort., depletion, $m
  4,720
  4,924
  5,139
  5,365
  5,601
  5,850
  6,111
  6,385
  6,673
  6,975
  6,663
  6,996
  7,346
  7,713
  8,099
  8,504
  8,929
  9,375
  9,844
  10,336
  10,853
  11,396
  11,966
  12,564
  13,192
  13,852
  14,544
  15,272
  16,035
  16,837
Funds from operations, $m
  8,025
  8,424
  8,792
  9,179
  9,585
  10,012
  10,460
  10,930
  11,424
  11,943
  12,317
  12,889
  13,489
  14,119
  14,781
  15,476
  16,206
  16,972
  17,776
  18,621
  19,508
  20,439
  21,417
  22,444
  23,522
  24,654
  25,842
  27,090
  28,400
  29,776
Change in working capital, $m
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -32
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -52
  -54
  -57
  -60
  -63
  -66
  -69
Cash from operations, $m
  8,042
  8,441
  8,811
  9,199
  9,606
  10,033
  10,483
  10,954
  11,449
  11,969
  12,345
  12,918
  13,519
  14,151
  14,815
  15,511
  16,243
  17,011
  17,817
  18,664
  19,553
  20,486
  21,466
  22,495
  23,576
  24,711
  25,902
  27,153
  28,467
  29,846
Maintenance CAPEX, $m
  -3,894
  -4,090
  -4,295
  -4,510
  -4,735
  -4,972
  -5,221
  -5,482
  -5,756
  -6,044
  -6,346
  -6,663
  -6,996
  -7,346
  -7,713
  -8,099
  -8,504
  -8,929
  -9,375
  -9,844
  -10,336
  -10,853
  -11,396
  -11,966
  -12,564
  -13,192
  -13,852
  -14,544
  -15,272
  -16,035
New CAPEX, $m
  -1,968
  -2,045
  -2,148
  -2,255
  -2,368
  -2,486
  -2,610
  -2,741
  -2,878
  -3,022
  -3,173
  -3,331
  -3,498
  -3,673
  -3,857
  -4,049
  -4,252
  -4,465
  -4,688
  -4,922
  -5,168
  -5,427
  -5,698
  -5,983
  -6,282
  -6,596
  -6,926
  -7,272
  -7,636
  -8,018
Cash from investing activities, $m
  -5,862
  -6,135
  -6,443
  -6,765
  -7,103
  -7,458
  -7,831
  -8,223
  -8,634
  -9,066
  -9,519
  -9,994
  -10,494
  -11,019
  -11,570
  -12,148
  -12,756
  -13,394
  -14,063
  -14,766
  -15,504
  -16,280
  -17,094
  -17,949
  -18,846
  -19,788
  -20,778
  -21,816
  -22,908
  -24,053
Free cash flow, $m
  2,180
  2,306
  2,368
  2,434
  2,503
  2,575
  2,652
  2,731
  2,815
  2,904
  2,826
  2,923
  3,025
  3,132
  3,245
  3,363
  3,487
  3,617
  3,754
  3,897
  4,048
  4,206
  4,372
  4,547
  4,730
  4,922
  5,124
  5,336
  5,559
  5,793
Issuance/(repayment) of debt, $m
  1,112
  2,429
  2,551
  2,678
  2,812
  2,953
  3,100
  3,255
  3,418
  3,589
  3,768
  3,957
  4,155
  4,362
  4,580
  4,809
  5,050
  5,302
  5,568
  5,846
  6,138
  6,445
  6,767
  7,106
  7,461
  7,834
  8,226
  8,637
  9,069
  9,522
Issuance/(repurchase) of shares, $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 from financing (excl. dividends), $m  
  1,112
  2,429
  2,551
  2,678
  2,812
  2,953
  3,100
  3,255
  3,418
  3,589
  3,768
  3,957
  4,155
  4,362
  4,580
  4,809
  5,050
  5,302
  5,568
  5,846
  6,138
  6,445
  6,767
  7,106
  7,461
  7,834
  8,226
  8,637
  9,069
  9,522
Total cash flow (excl. dividends), $m
  3,292
  4,735
  4,919
  5,112
  5,315
  5,528
  5,752
  5,987
  6,233
  6,492
  6,594
  6,880
  7,180
  7,495
  7,825
  8,172
  8,537
  8,919
  9,321
  9,743
  10,186
  10,651
  11,140
  11,653
  12,191
  12,756
  13,350
  13,973
  14,628
  15,315
Retained Cash Flow (-), $m
  -1,472
  -270
  -283
  -298
  -312
  -328
  -344
  -362
  -380
  -399
  -419
  -440
  -462
  -485
  -509
  -534
  -561
  -589
  -619
  -650
  -682
  -716
  -752
  -790
  -829
  -870
  -914
  -960
  -1,008
  -1,058
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
  84
  89
  93
  98
  103
  108
  113
  119
  125
  131
  138
  144
  152
  159
  167
  175
  184
  193
  203
  213
  224
  235
  247
  259
  272
  286
  300
  315
  331
  347
Cash available for distribution, $m
  1,820
  4,465
  4,635
  4,814
  5,002
  5,200
  5,407
  5,625
  5,854
  6,094
  6,176
  6,440
  6,718
  7,010
  7,316
  7,638
  7,976
  8,330
  8,703
  9,094
  9,504
  9,935
  10,388
  10,863
  11,362
  11,886
  12,436
  13,014
  13,620
  14,257
Discount rate, %
  9.00
  9.45
  9.92
  10.42
  10.94
  11.49
  12.06
  12.66
  13.30
  13.96
  14.66
  15.39
  16.16
  16.97
  17.82
  18.71
  19.65
  20.63
  21.66
  22.74
  23.88
  25.07
  26.33
  27.64
  29.03
  30.48
  32.00
  33.60
  35.28
  37.05
PV of cash for distribution, $m
  1,670
  3,727
  3,490
  3,239
  2,977
  2,708
  2,437
  2,167
  1,903
  1,649
  1,371
  1,155
  958
  781
  625
  491
  378
  285
  210
  151
  106
  72
  48
  31
  19
  12
  7
  4
  2
  1
Current shareholders' claim on cash, %
  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
  100.0

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 7.2
Price to Sales 0.5
Price to Book 5.1
Price to Tangible Book
Price to Cash Flow 2.9
Price to Free Cash Flow 24.2
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 $42207 million for the last fiscal year's total revenue generated by American Airlines Group. The default revenue input number comes from 2017 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 5% 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 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 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 0.2%.

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 92.3%.

Life of production assets of 10 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 -0.8%. 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 - $3926 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 478 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 $18.1 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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▶ [$$] American Airlines Lowers Outlook on Rising Fuel Costs   [09:04AM  The Wall Street Journal]
▶ [$$] U.S. Airlines Meet Beijing Halfway on Describing Taiwan   [Jul-25-18 08:15PM  The Wall Street Journal]
▶ American changes website language to comply with Chinese order   [01:14PM  American City Business Journals]
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