Profitability not Restored During Q4 at American
No-moat-rated American Airlines restored its network to a greater extent than peers during the fourth quarter but increased fixed cost utilization has not brought operating margins above zero just yet.
No-moat-rated American Airlines AAL restored its network to a greater extent than peers during the fourth quarter but increased fixed cost utilization has not brought operating margins above zero just yet. Sales of $9.4 billion and adjusted loss per share of $1.42 beat FactSet's consensus by 0.9% and 2.6%, respectively. We anticipate raising our fair value estimate for the firm by roughly 5% to reflect the time value of money as well as Morningstar’s updated assumption that corporate tax increases will not occur.
Passenger revenue came in at about 81.0% of 2019 levels as the firm flew 13% fewer available seat miles than in 2019, load factors decreased 510 basis points to 78.7%, and yields increased by roughly 0.9%. American, like all airlines, is seeing the effects of oil price increases within the firm’s cost structure. Fuel prices per barrel increased 14.0% from the prior quarter, whereas yields increased by only 3.4%. We expect yields will continue to rise in the coming year as oil price increases are more fully passed through onto the consumer, but we see high fuel prices as a key risk to airline investors. We think that high oil prices drive high ticket prices, but also that high ticket prices depress demand. That noted, American has the youngest, most fuel-efficient fleet of any North American network carrier, so, all other things equal, we would expect the firm to operationally outperform during periods of high oil prices.
Operating margins, excluding special items, came in at negative 8.1%, which we see as somewhat discouraging considering the firm is rapidly increasing supply and posting best-among-peers load factors. That noted, the firm had some abnormal costs during the quarter due to the omicron variant, the firm’s widebody capacity is still underutilized, and cumulative yield growth from 2019 remains well below inflation, so we still see room for significant operational improvement in the near term for the airline.
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