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AAL
1. American Airlines Group (AAL)
Bankruptcy Hides Transition to a “New American”
LONG, TP $46 (+30%)
RESEARCH TEAM
Parker Kim, Senior Director
Mark Albin, Senior Analyst
Charlene Shu, Junior Analyst
Christopher Boyd, Analyst
Daniel Chen, Analyst
Karsic Ma, Analyst
2. September 2014
Table of Contents
Investment Thesis
Parker Kim
Company Overview
Daniel Chen
Industry Overview
Christopher Boyd
Competitive Overview
Karsic Ma
Financial Overview
Mark Albin
Risk Overview
Charlene Shu
4. September 2014
Investment Thesis
Investors Need More Evidence to be Convinced
AAL P/E Shows Underappreciation
Despite Becoming a Dominant Player
Why does AAL trade at
discount to its peers
despite having superior
market share and
profitability?
We believe the market is
holding American back because
they can’t let go of its
turbulent past and are waiting
for merger execution.
5. September 2014
Investment Thesis
The “New American” Isn’t Just a Slogan
AAL Yields Have Grown the Most
Margins Closing in on “Best-in-Class”
Despite negative investor
sentiment, we believe that
Network Quality
+
Yield Growth
+
Profitability Gains
Indicate AAL both has been and
will continue to be successful in
executing the US Airways merger
7. September 2014
Company Overview
An International Network Carrier with Strong Market Share
Airline Carrier + Airfreight Services Recently emerged from bankruptcy
Fleet of 903 aircraft
Focus on fleet replacement and
existing plane retrofitting to develop
the most modern, efficient fleet
Largest and most extensive network
in the US
Filed bankruptcy in Nov 2011 after it
was unable to pay its high debt
payments
Agreed to a merger with US airways
and restructured its obligations to
emerge as a more efficient airline
with a stronger network
8. September 2014
Company Overview
Competitive Advantage
Partnerships with other airlines
strengthens international network
Frequent flier programs boosts
customer retention
#1 network strength makes
choosing AAL a logical choice
for frequent fliers
9. September 2014
Company Overview
Post-Merger, US Airways Management Poised to Launch AAL
Doug Parker
Chairman & CEO
Scott Kirby
President
Derek Kerr
CFO
Experienced US Airways management team is key to executing
on merger benefits
Synergy Targets: $1.4bn
PwC Study: cost-cutting, increased efficiency, stronger network
Every performance metric has improved – approaching #1 rank
10. September 2014
Company Overview
SWOT Analysis Indicates Opportunity in Pacific Markets
Strengths
Largest network
Largest frequent flier program
Experienced management team
Excellent profitability margins
Merger execution risk
High leverage risk from fleet
improvements
Continued growth in disposable
income
Increased business travel aligns
with strong business traveler
exposure
Increased demand for Pacific travel
Technology-based disruptions in
business travel (ie. Skype)
Frequent-flier stealing programs
Opportunities
Weaknesses
Threats
12. September 2014
Industry Overview
Market Forces Make Airlines a Tough but Feasible Play
Large start up costs to purchase planes
discourage new entrants
Regulatory issues and airport leasing
process make the startup path difficult
Low switching costs and few variations
between AAL/DAL/UAL make customer
retention difficult
However, frequent flier programs offset this
Competition is based on price which forces
razor-thin profit margins
Differentiation difficult, focus is on frequent
flier programs + comprehensive network
Leisure carriers are the most susceptible to
alternatives in domestic travel
Only 2 major suppliers: Airbus + Boeing
Recently, AAL has begun purchasing planes
from Airbus (previously only Boeing)
Despite duopoly, pricing power remains fair
HIGH
MODERATE
HIGH
LOW
MODERATE
Porter’s AssessmentIndustry Dynamic Rationale
Barriers to Entry
Bargaining Power of
Buyers
Intensity of Rivalry
Threat of Substitutes
Bargaining Power of
Suppliers
13. September 2014
Industry Overview
Post-Consolidation, Pricing Power Should Improve
Favorable Industry Environment
The major US carriers
should continue to benefit
from a landscape where
consolidation has optimized
load factors.
Strong demand is producing
record load factors.
Revenue optimization
initiatives combined with
structural cost reductions
should drive industry
profitability up.
14. September 2014
Industry Overview
Industry Improvements Have Seen Tangible Success
US Airlines have begun generating economic returns
(ROIC > WACC)
Cost reductions have successfully slowed cost growth
to ~3% per year (even less for AAL)
In the environment of consolidation, airlines have shifted their
focus from aggressive market share warfare to optimizing their
internal processes.
16. September 2014
Competitive Overview
Competitive Advantage leads to Revenue Success
AAL revenue per mile is continually growing and has
recently moved to #2 in the industry.
While its cost per mile has run in line with network
operators.
American holds the most market
share in the largest market
segment
20. September 2014
Financial Overview
Seemingly Riskier Balance Sheet is not as Bad as Perceived
We project AAL’s total liquidity position ex-RCF to be
between $10-12bn for 2014-2016
...but we forecast Debt / EBITDAR levels to normalize
as cash flows mature and debt is paid down.
Liquidity as a % of LTM Revenue has topped the
industry for the last year
AAL does have the largest debt position of its network
peers…
21. September 2014
Financial Overview
Seemingly Riskier Balance Sheet is not as Bad as Perceived
Free cash flow levels should
begin to normalize to begin
funding capital structure
changes.
28. September 2014
Risk Overview
General Risk Overview
Union Integration Fuel Price Risk Labor Cost Control
Association of
Professional Flight
Attendants voted last
Wednesday and
reached a 5-year
agreement with AAL.
Integration issues
between LCC-AMR
unions resolved with
this.
AAL has invested in
newer and more
comfortable planes to
keep up with
competition and lower
fuel consumption.
Fuel costs represent
~35% of OpEx but
should approach 32-
33% by 2016.
Contract lasting through
2019 to be signed in
December- includes
modest 2% pay raises
and shortening of pay
ladder.
Overall should improve
quality of life for
personnel.
29. September 2014
Conclusion
Investors aren’t Seeing the “New American”
Low Valuation
Strong operational
success
Profitability gains
Investors are waiting to
buy AAL because they are
afraid its recent merger
will fail.
In reality, AAL has already
begun to exhibit signs of
merger success and could
end up being the star of
the industry.
30. American Airlines Group (AAL)
Appendix
September 30, 2014
Research Team
Parker Kim, Senior Director
Mark Albin, Senior Analyst
Charlene Shu, Junior Analyst
Christopher Boyd, Analyst
Daniel Chen, Analyst
Karsic Ma, Analyst