american airlines stock presentation
TRANSCRIPT
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE 1
Stock Analysis: American Airlines GroupGroup 4: Brian Jones, Ben Drabinski, Jimmy Yu, Trent Bruchhaus, Spencer Wharton, Kara Stessl
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE 2
Introduction
Quality
Growth
Momentum
Valuation
Target Price
Today’s Agenda
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History of American Airlines GroupThe American Airlines Group was formed in December 2013 through the merger of American Airlines and US Airways. While AMR stakeholders took 72% ownership of the company, US Airways retained the majority of operational management positions, including appointing Doug Parker as the new CEO.
Improving FinancialsImproving margins and efficiency
AA and US Airways MergerDivisions include: American Airlines,
Envoy Air, US Airways, Piedmont
Airlines, PSA Airlines, American Eagle,
US Airways Express.
World’s Largest AirlineGenerates over $40 billion in revenue,
flies over 193 million passengers, and
has a flight size of 962 aircrafts.
Stock Features
Ticker AAL
Exchange NASDAQ
Current Price $49.22
Market Cap 33.91 B
IWF Ranking 66
Shares Outstanding 696.65 M
52-Week Range $28.10- $56.20
Dividend Yield 0.82%
Sector Consumer Discretionary
Industry Airlines
OVERVIEW AND STOCK FEATURES
$49.22
American Airlines Group Competitors
Data from Bloomberg
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AAL Stock Performance (since merger)
65% 35%
Revenue per Passenger Miles
Domestic International
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Engage our team membersEnsure they have the tools and information they need to do the jobs they perform so well. Create an environment of well coordinated, collaborative teamwork and mutual respect.
Be an industry leaderSafe and reliable airline operations – It must be a part of the fiber of our company.
Focus on our customers’ needs and
wantsProvide a network and a product that is as good or
better than our competitors.
Look to the futureOur industry is evolving and
we need to ensure we are leading the change, not
chasing it.
Provide a return for our investorsAs the largest airline in the world, we should be the most profitable. If not, investments will go to other airlines than ours and that is not a formula for success.
Strategic Plan to “Restore American to the Greatest Airline in the World”
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COMBINED FLIGHT PATHS
10 HUBSJFK, LGA, Chicago, Dallas, Miami, LAX, Charlotte, PHL, Phoenix, Washington DC
54 COUNTRIES
339 DESTINATIONSAVERAGING 6,700 FLIGHTS PER DAYOFFERS MOST DESTINATIONS OF ANY AIRLINE IN THE WORLD
WORLD’S LARGEST AIRLINE BY REVENUE, PASSENGERS FLOWN, AND KILOMETERS FLOWN/PASSENGER
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Data from AAL Investor Relations
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BUSINESS QUALITY
#4 #4 #5
#6 #5 #3
#3 #1 #1
Post-Merger Competitive Network
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Data from AAL Investor Relations
Market Share % 19.9 18 16 12.6 33.5
AAL DAL UAL SWA Other
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Competitive Advantage• International
Placement and
Route
Structure
• Economies of
Scale
• Brand Loyalty
Route Structure and International PlacementLargest airlines in the
world with more
routes and hubs than
any other. Can
capitalize on their
advantages in routing
and hubs. Further
expansion into Asia
and South America
will be key.
Economies of Scale
Capacity to scale
upwards unmatched
by any other airlines.
Operational
efficiencies a result of
the merger. In the
process of a major
airplane purchasing
program.
Brand Loyalty
Combining US Airways
Dividend Miles
program into
American Airlines
AAdvantage program
within the next 30
days. Greater sales
and brand loyalty
expected.
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BUSINESS QUALITY
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FIVE FORCES ANALYSIS
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New
Entrants
• Low; Requires a large amount of capital to enter, existing players already have a cost advantage. Customers tend to use larger airlines with established brand identities.
Substitutes
• Medium; Substitutes within the airline industry; cars, buses, boats, and trains a threat for domestic travel.
Suppliers
• Low; Dominated by Boeing and Airbus; high switching costs; long-term contracts
Buyers
• Low; Consolidated industry can keep prices high; low switching costs
Rivalry
• High; few players competing on price and availability; mature stage of the business cycle
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MANAGEMENT QUALITY AND CORPORATE GOVERNANCE
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CEO: Doug Parker• Personal Strengths: financial analysis and financial management,
operational improvements, prior airline merger experience• Experience: Prior Chairman and CEO of US Airways; Prior Chairman
and CEO of American West, led the firm out of the 9/11 crisis
Board of Directors• Large Board: 11 members• 10 independent board members• More than half of the members are investors (Bank, PE, HF)
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Union pay and constrictions negotiations have potential to be timely and costly..
Labor
Consolidated industry with few players.
Intense Industry Competition
Extremely high leverage has potential for significant losses.
Significant IndebtednessCondition of the economy and fuel
price could have a significant impact.
Potential for Significant Losses
Expected synergies of $1+ billion may not be fully realized.
Merger
Obtaining and paying for increased financing could be costly.
Financing
COMPANY & INDUSTRY RISKS
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AIRPLANE INVENTORY AND EXPECTATIONS
2015 is proving to be an important year for American Airlines regarding its fleet purchases and lease expirations
Data from AAL 10-K
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Note: Aircraft deliveries include order, option, option LoI, and LoI. Fleet turnover rates were estimated taking the current fleet count and dividing by the annual number of deliveries from 2014-2020.
AIRLINE INDUSTRY FLEET COMPARISON
Alaska Airli
nes
Allegiant A
ir
American-U
S Airways
Delta
Frontier Airli
nes
Hawaiian Airli
nes
JetBlue Airli
nes
Southwest Airli
nes
Spirit Airli
nes
Sun Country Airli
nes
United Airli
nes
Virgina Americ
a0
200
400
600
800
1000
1200
2013 Fleet Size 2014-2020 projected deliveries
American-U
S Airways
Delta
Frontier Airli
nes
Hawaiian Airli
nes
JetBlue Airli
nes
Southwest Airli
nes
Spirit Airli
nes
Sun Country Airli
nes
United Airli
nes
Virgina Americ
a0
2
4
6
8
10
12
14
16
18
Avg. fleet age (yrs), 2013 9 22 Avg. fleet age (yrs), 2020 (est.) 8 -
Data from Flightglobal Ascend Fleets database (August 2014)
Fleet Size Projections Average Fleet Age Projections
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• The program started by retiring its fleet of MD-80 aircraft, with an average age of 22 years, with Boeing 737-800s
• Claims it will have the “industry’s youngest and most fuel-efficient fleet” within 5 years..
• Industry is being pushed by the government’s Environmentally Responsible Aviation project
Expected to cut its average fleet age from 13 years in 2013 to 7 years in 2020 (Industry average – 13 years in 2013 and 11 years in 2020 (est.)).
Began in 2009 in order to replace its
oldest airplanes with newer, more fuel
efficient, technologically
advanced aircraft.
AIRPLANE FLEET EXPECTATIONS
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
Data from AAL 10-K
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SOFT TRAVEL DEMAND YTD…BUT HIGHER EFFICIENCY!
AAL posted a slight decline in airline traffic for FebruaryDrop of 0.7% in revenue
passenger miles (RPMs) to 14.97 billion from February 2014
However, the percentage of seats filled with passengers
increased to 79.3% from 78.4% in Feb. 2014
A sign of increased efficiency
0.9%
0.7%
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
Data from AAL 10-K
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BankruptcyAmerican Airlines emerged from Chapter 11 bankruptcy just before the merger with US Airways in December 2013
PensionsPension benefits by Union members. Promised before bankruptcy proceedings – worth appx. $212 million
AntitrustAnti-trust action against the merger. No trial date currently set.
Sabre Lawsuit
LEGAL PROCEEDINGS
Sabre is charged with restricting American Airlines’ ability to our products to customers in order to protect their own market share.
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R/ASM• Revenue per available
seat mile
• percentage of available seating capacity that is filled with passengers
• considered to be the most important airline metric
Load Factor
C/ASM• Cost per avaiilable seat
mile• Represents how much it costs to
fly one seat one mile
Yield• Revenue per passenger
mile (RPM)
AIRLINE OPERATING METRICS
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201420132012201120102009200820072006200574
76
78
80
82
84
American Airlines (AAL) 201420132012201120102009200820072006200570
72
74
76
78
80
82
84
86
American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL)
JetBlue Airways (JBLU) Southwest Airlines (LUV)
201420132012201120102009200820072006200510
11
12
13
14
15
16
17
18
American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL)
JetBlue Airways (JBLU) Southwest Airlines (LUV)2014201320122011201020092008200720062005101112131415161718
American Airlines (AAL)
Load Factor (%)
Yield (cents)
Data from Factset
Load Factor (%)
Yield (cents)
AIRLINE OPERATING METRICS
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20142013201220112010200920082007200620058
9
10
11
12
13
14
15
American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL)JetBlue Airways (JBLU) Southwest Airlines (LUV)
20142013201220112010200920082007200620058
9
10
11
12
13
14
15
American Airlines (AAL)
201420132012201120102009200820072006200510
15
20
25
30
35
40
American Airlines (AAL)2014201320122011201020092008200720062005
0
5
10
15
20
25
30
35
40
American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL)
JetBlue Airways (JBLU) Southwest Airlines (LUV)
R/ASM (cents)
Data from Factset
C/ASM (cents)
R/ASM (cents)
C/ASM (cents)
AIRLINE OPERATING METRICS
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PROFITABILITY QUALITY
Data from Factset
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
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AAL UAL DAL JBLU LUV0
5
10
15
20
25
30
AAL UAL DAL JBLU LUV0
2
4
6
8
10
12
14
AAL UAL DAL JBLU LUV0
1
2
3
4
5
6
7
8
AAL UAL DAL JBLU LUV0
1
2
3
4
5
6
7
8
American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL) JetBlue Airways (JBLU) Southwest Airlines (LUV)
Gross Margin (%) 26.7 14.0 16.6 13.3 24.5
Operating Margin (%) 11.8 7.5 7.7 9.4 12.6
Net Margin (%) 6.8 2.9 1.6 6.9 6.1
ROA (%) 6.7 3.0 1.2 5.3 5.8
ROE (%) - 42.0 6.4 17.2 16.1
Gross Margin (%) Operating Margin (%) Net Margin (%) ROA
Data from Factset
PROFITABILITY QUALITY
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Data from Factset
LIQUIDITY AND CREDIT QUALITY
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
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AAL UAL DAL JBLU LUV0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
AAL UAL DAL JBLU LUV0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
AAL UAL DAL JBLU LUV0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
AAL UAL DAL JBLU LUV0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL)
JetBlue Airways (JBLU) Southwest Airlines (LUV)
Interest Coverage (EBIT) 5.3 4.0 5.0 3.7 18Total Debt/EBITDA 2.8 2.6 2.0 3.1 0.8Net Debt/EBITDA 1.6 1.7 1.1 2.3 -0.1LT Debt/EBITDA 2.5 2.3 1.8 2.8 0.7Total Debt/Total Capital 90.0 83.5 52.6 51.8 28.4Total Debt/Total Assets 41.6 32.4 18.1 34.7 13.3
Data from Factset
Interest Coverage (EBIT) Total Debt/EBITDA Total Debt/Total Capital Total Debt/Total Assets
DEBT COVERAGE
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AMERICAN AIRLINES GROWTH
• Growing passenger revenue per available seat miles
• Improving Load factors to 82% by the end of 2014
• Declining Cost available seat driven by lower jet fuel cost
Towards ahead
AIRLINE INDUSTRY METRICS
HISTORICAL GROWTH
Data from Factset
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
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Dec '05 Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
Dec '05 Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14
-100.00
-50.00
0.00
50.00
100.00
150.00
200.00
250.00
Dec '05 Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14
-3,000.00
-2,000.00
-1,000.00
0.00
1,000.00
2,000.00
3,000.00
4,000.00
Dec '05 Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14
-400.00
-300.00
-200.00
-100.00
0.00
100.00
200.00
300.00
400.00
HISTORICAL GROWTH
Data from Factset
Sales Growth (%) EBITDA Growth (%)
Net Income Free Cash Flow Growth (%)
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Capacity constraint for full-services
airlines: strong pricing power
Grow capacity through capital expenditure at
2-3% vs GDP growth rate at
3.3%
Low fuel cost
Continued trend of high
domestic yieldU.S. economic
growth
GROWTH DRIVERS
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
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AMERICAN AIRLINES CAPACITY
• Leading capacity growth: 2-3% capacity growth of AAL vs 1-2% capacity growth at DAL, UAL
• 6-7% capacity growth for lower cost airlines
• CapEx focuses on purchasing of short haul airlines to exploit domestic markets
World Airline Capacity & Passenger Traffic
Data from Factset
GROWING CAPACITY AND ACQUISITION STRATEGY
US Airline Capacity
• Competition in Asian and Trans-Pacific routes due to overcapacity lower yield
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Data from Factset
PRICE MOMENTUM
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
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PRICE MOMENTUM
Data from Factset
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
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Strong rebound coming out of bankruptcy
Positive earnings drive stock price upwards
Data from Factset
EARNINGS MOMENTUM
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Current Trading Price: $49.22 Upside Potential: 24.9%
DCF VALUATION
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
Data from Factset
Key Inputs
Projected out 3 years
Low WACC for Airlines (5.64%)
4% Short-Term Growth
3% Long-Term Growth
35% Tax Rate
11.86% EBIT Margin
Results (in millions)
Enterprise Value: $52,992
Debt Value: $18,229
Cash: $8,077
Equity Value: $42,840
Shares: 696.6
Share Price: $61.50
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AAL UAL DAL JBLU LUV0
2
4
6
8
10
12
14
AAL UAL DAL JBLU LUV0
0.20.40.60.8
11.21.41.61.8
AAL UAL DAL JBLU LUV0123456789
10
AAL UAL DAL JBLU LUV0
0.20.40.60.8
11.21.41.61.8
American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL) JetBlue Airways (JBLU)
Southwest Airlines (LUV)
P/E LTM 12.5 23.1 58.3 15.2 27.1P/E NTM 4.8 6.2 9.1 10.7 12.5PEG NTM 0.2 0.3 0.4 0.3 0.6P/Sales 0.8 0.7 0.9 1 1.6P/Bk 17 10.6 4.3 2.2 4.4P/CF 11.6 9.6 7.7 6.8 10.5EV/EBITDA 6.8 7.6 6.6 8.9 9.1EV/Sales 1 0.9 1.1 1.3 1.6Div Yld 0.8 0 0.8 0 0.5
P/E NTM Price/Sales EV/EBITDA EV/Sales
PEER MULTIPLES
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
Data from Factset
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AAL Multiple Competitors Median Valuation Upside Potential
P/E (LTM) 12.5 19.15 $75.41 53.21%
P/E (NTM) 4.8 9.9 $101.52 106.26%
P/Sales 0.8 0.95 $58.45 18.75%
EV/EBITDA 6.8 8.25 $62.83 27.65%
EV/Sales 1.0 1.2 $58.90 19.67%
TARGET PRICE RANGE
$65-$75 32.1% - 52.38%
RELATIVE VALUATION
UPSIDE POTENTIAL
OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE
Data from Factset
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Current Price: $49.2214 Buys 2 HoldsUpside Potential: 32.1%
Target Price: $65Annual Dividend: $0.40Street Target Price: $69.53
Data from AAL Investor Relations and Factset
CONCLUSION
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QUESTIONS?