Skip to Content
Stock Analyst Update

American's Revenue Strategy Risky, but no Other Option

We are reducing our fair value estimate to $14.50 per share from $15, and we remind investors we think that American Airlines' considerable financial leverage widens the dispersion of potential equity values relative to peer airlines.

Mentioned:

No-moat-rated American Airlines (AAL) reported a grueling second quarter, as the firm continues to operate by the playbook of raising cash and conserving cash to survive a depressed operating environment. We are reducing our fair value estimate to $14.50 per share from $15, and we remind investors we think that American’s considerable financial leverage widens the dispersion of potential equity values relative to peer airlines.

Revenue was down roughly 86%, which modestly outperformed peers due to the firm’s strategy of shrinking capacity less than other airlines to potentially capture additional market share as air traffic recovers. American ran at about 25% of 2019 capacity, while peer legacies ran closer to 10%-15%. While we’ve commended peer carriers with better balance sheets that have pursued a similar strategy, we think that American’s $50 billion of debt and purchase obligations increase the risk of needing to return to capital markets (which may not be welcoming) if passenger traffic deteriorates over the next few months, as operating more flights inherently increases variable costs. On the other hand, American may not be able to service its debt burden if it misses out on the recovery, so the firm may be backed into a corner. To American’s credit, it achieved a peer-leading 42.3% load factor, but we note that American is also centered in the Sunbelt, which was less affected by the pandemic during the second quarter.

Excluding the CARES Act and fuel costs, American cut operating expenses by about 35%, less than peers, though this is partially due to the firm running more flights and incurring more variable costs. The firm hopes to return to being cash-positive in 2021. While we’re pricing in a COVID-19 vaccine being broadly available by mid-2021, we do not think the firm will be able to post an annual operating profit in 2021 as we think losses in the first half would overshadow any potential operating profit in the second half.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Burkett Huey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.