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Increasing Our Fair Value on American Airlines

New revenue opportunities that were quantified at the firm's latest investor day drove the $3 per share boost.

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American Airlines Group Inc

American believes it can drive $2.9 billion in additional revenue (about 1.5% of our total 2017-21 forecast revenue) through 2021. Basic and premium economy are the largest opportunities at $1 billion, and co-branded credit cards provide another $550 million; both were already quantified. However, American also quantified other initiatives that should generate another $1.35 billion. On the cost side, American sees a $1 billion opportunity thanks to its One Airline project, which further integrates US Airways. Management cited flight attendant harmonization, a reduction in subfleets, and maintenance integration as important steps.

American reiterated a $5 billion pretax income target, noting that consensus sits at $3.6 billion and $3.9 billion for 2017 and 2018, respectively. Management also discussed an adjusted (excluding fuel, special items, and any contract changes) unit cost growth target of 2% in 2018 and 1%-2% in 2019 and 2020. Taking into account revenue and cost efforts, we are modeling pretax income averaging $4.4 billion from 2017 to 2021, and normalized pretax income is set at $5.5 billion, representing a 11.5% margin.

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About the Author

Chris Higgins

Senior Equity Analyst
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Chris Higgins, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers aerospace and defense companies, airports, and airlines.

Before joining Morningstar in 2015, Higgins spent eight years working for Airbus Group in both the United States and Europe. While at Airbus Group, he held a variety of positions, ranging from corporate development to investor relations.

Higgins began career in strategy consulting, where he consulted leading U.S. and European aerospace and defense prime contractors. During his time in consulting, he led teams that solved business challenges ranging from merger and acquisition decisions to new product launches.

Higgins holds a bachelor’s degree in economics from Rhodes College, where he graduated as a member of Phi Beta Kappa, and a master’s degree in finance from The Henley Business School in the United Kingdom. He also holds the Chartered Financial Analyst® designation.

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