Increasing Our Fair Value on American Airlines

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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