AAL - American Airlines Group

[nickenumbers]

Guys,

 

I am thinking about buying some options on AAL at $40 SP.  It still has a great long term thesis.  I believe that Oil Prices and the ongoing worry about the future recession is pushing it down.  [along with the other airlines.]

 

The PE today is 6.5.  both price and PE continue to drop.  Price down 6% today.

 

I get that oil prices are going to hurt its profitability, but I don't understand why such a large price movement in a week, month YTD.  I am guessing FEAR.

 

What do you guys think?

[Gregmal]

Put this on the radar recently as well. 100% agree.

[walkie518]

Guys,

 

I am thinking about buying some options on AAL at $40 SP.  It still has a great long term thesis.  I believe that Oil Prices and the ongoing worry about the future recession is pushing it down.  [along with the other airlines.]

 

The PE today is 6.5.  both price and PE continue to drop.  Price down 6% today.

 

I get that oil prices are going to hurt its profitability, but I don't understand why such a large price movement in a week, month YTD.  I am guessing FEAR.

 

What do you guys think?

certainly an interesting play, should be noted that AAL doesn't hedge fuel costs and jet fuel is up in material percentage terms y/y

 

as a result, should oil continue its climb (however unlikely) the aircraft fuel and related taxes line will continue to increase... without digging further, this line on the P&L statement shows a $600m/qtr increase in fuel and related tax costs on $11.6B of revenues.  That is, ~5% of revenues up in smoke.

 

The updated guidance shows a further increase on cost with roughly the same amt of projected gallons consumed...at the same time, looks like they're hiking prices to combat those costs

 

perhaps unlikely due more to demand than anything else, but this could lead to erosion of utilized seat miles when some comps have kept hedge books intact?

[Spekulatius]

re AAL

- trashy BB- credit 9 years into the recovery after a $10B buyback binge. Not my cup of tea.

[nickenumbers]

re AAL

- trashy BB- credit 9 years into the recovery after a $10B buyback binge. Not my cup of tea.

 

When I was in my 20s "Trashy" could be a rewarding quality in a Friday night date candidate  ;) ;).....  followed by Drama and a hangover!  :o

[Spekulatius]

re AAL

- trashy BB- credit 9 years into the recovery after a $10B buyback binge. Not my cup of tea.

 

When I was in my 20s "Trashy" could be a rewarding quality in a Friday night date candidate  ;) ;).....  followed by Drama and a hangover!  :o

 

Been there, done it. But as one gets older, the quality aspect becomes more important. Seems the same with stocks actually.

[gfp]

Board member John Cahill (former Kraft CEO) bought 25k shares at $33.47 on the recent weakness.

 

https://www.sec.gov/Archives/edgar/data/6201/000122520818014988/xslF345X03/doc4.xml

[ander]

I have not done much research on the airline industry historically. I've noticed that AAL has sold off relative to most of the other airlines. It trades at a similar multiple, but has substantially lower margins. Anything structural or transient issues and it's worth a look?

[vince]

I have not done much research on the airline industry historically. I've noticed that AAL has sold off relative to most of the other airlines. It trades at a similar multiple, but has substantially lower margins. Anything structural or transient issues and it's worth a look?

 

Definitely worth a look and looks very attractive relative to their earning power.  Their stock has suffered more because they are having labour issues, operational issues, they were later with their acquisition, and most importantly they have significantly more debt than the others.  Their loyalty business is extremely valuable, much more value than market cap of whole company

[walkie518]

I have not done much research on the airline industry historically. I've noticed that AAL has sold off relative to most of the other airlines. It trades at a similar multiple, but has substantially lower margins. Anything structural or transient issues and it's worth a look?

 

historically, AAL has not hedged jet fuel prices

 

the fleet is relatively young as they made commitments to buy new planes right before declaring bankruptcy so this shd be a positive

 

authorized a lot of buybacks (incl AAG buybacks)

 

the income stmt has a very large "other line" 

 

net income is up 18% 1H2019 vs to 1H2018 but net cash from operating activities is down 17%... curious though might be pension plan?

 

then again, rev passenger miles were up 3% on avl flat seat miles and fuel exp down

 

737 max prob should be resolved by January?

 

cash flow statement is weird, no real breakdown of cash flow from operating activities... assumption must be that the operating statement tells all?

 

[UK]

https://www.barrons.com/articles/shares-of-american-airlines-could-be-ready-for-takeoff-after-a-very-bad-year-51569605713

 

"American fetches just five times estimated 2020 earnings of $5.50 a share. Its stock is the worst performing major airline over the past year, dropping 33%, far worse than the 3% average drop of airline peers over the same span. The rest of the group isn’t exactly soaring: U.S. carriers trade for less than eight times estimated 2020 earnings"

[Cardboard]

You didn't hear? 2.5% of global CO2 emission and this has got to stop!

 

Seriously, I think this may start to get some traction in developed countries especially in Europe. I would expect some people to reduce air travel for leisure. More importantly, large corporations are notarious to jump on such things to encourage/make their employees travel less. They did the same thing after 911 as travel costs and time went up.

 

Even if we are just talking 0.5% to 1%, this is a big headwind for a business with high fixed costs and low profit margins. We will see in coming months, years if this happen.

 

Then you have recession fears. Until the recession has passed, whenever it happens, I think you have to expect low valuation. That is how they treat all cyclicals right now or price in the worst now, even if the worst is unknown and even if timing unknown.

 

So you may want to buy this one and short a more expensive one. Or buy it, then sell it whenever it goes up 20%. I would not recommend to just buy and hold as they will likely (algos and hedge funds) take this down lower over time or again until recession hits.

[cameronfen]

You didn't hear? 2.5% of global CO2 emission and this has got to stop!

 

Seriously, I think this may start to get some traction in developed countries especially in Europe. I would expect some people to reduce air travel for leisure. More importantly, large corporations are notarious to jump on such things to encourage/make their employees travel less. They did the same thing after 911 as travel costs and time went up.

 

Even if we are just talking 0.5% to 1%, this is a big headwind for a business with high fixed costs and low profit margins. We will see in coming months, years if this happen.

 

Then you have recession fears. Until the recession has passed, whenever it happens, I think you have to expect low valuation. That is how they treat all cyclicals right now or price in the worst now, even if the worst is unknown and even if timing unknown.

 

So you may want to buy this one and short a more expensive one. Or buy it, then sell it whenever it goes up 20%. I would not recommend to just buy and hold as they will likely (algos and hedge funds) take this down lower over time or again until recession hits.

 

I'm skepical people will stop flying due to global warming.  There will be a fringe, but air travel is too convineint for it to move the needle for 99.9% of people.  I don't know how to handicap recession though. 

[Cardboard]

If it is only 0.1% as you mentioned then there are a lot of hypocrites. However, I think it will amount to more than that as support for Greens is growing. Prior there was also zero thought about it, now it is part of the discussion.

 

On large global corporations, I am 100% convinced that it will have an impact. Already, managers are evaluated for their contribution to reduce emissions. This affect their pay. So choices will be made to think about size of a crew to go for a training, further use of video conferencing, etc.

[StubbleJumper]

If it is only 0.1% as you mentioned then there are a lot of hypocrites. However, I think it will amount to more than that as support for Greens is growing. Prior there was also zero thought about it, now it is part of the discussion.

 

On large global corporations, I am 100% convinced that it will have an impact. Already, managers are evaluated for their contribution to reduce emissions. This affect their pay. So choices will be made to think about size of a crew to go for a training, further use of video conferencing, etc.

 

 

Oh, I'm not worried about the actions of individuals.  Frankly, air travel is cheap and convenient.  Damned few of us will change our habits because a 12 year-old delivered a naive lecture to the United Nations.  IMO, what is a more realistic concern is that a couple of do-gooder politicians could jump abord this train and impose a special air tax to discourage air travel (oops, I meant to say to fund a carbon offset and save the planet from certain doom).  An additional tax of $100 or $200 per ticket would throw a real wrench into the works.

 

 

SJ

[cameronfen]

If it is only 0.1% as you mentioned then there are a lot of hypocrites. However, I think it will amount to more than that as support for Greens is growing. Prior there was also zero thought about it, now it is part of the discussion.

 

On large global corporations, I am 100% convinced that it will have an impact. Already, managers are evaluated for their contribution to reduce emissions. This affect their pay. So choices will be made to think about size of a crew to go for a training, further use of video conferencing, etc.

 

 

Oh, I'm not worried about the actions of individuals.  Frankly, air travel is cheap and convenient.  Damned few of us will change our habits because a 12 year-old delivered a naive lecture to the United Nations.  IMO, what is a more realistic concern is that a couple of do-gooder politicians could jump abord this train and impose a special air tax to discourage air travel (oops, I meant to say to fund a carbon offset and save the planet from certain doom).  An additional tax of $100 or $200 per ticket would throw a real wrench into the works.

 

 

SJ

 

Yeah, I think this could be more likely.  Although I would be for it, although not $100 or $200 dollar tax, as that is probably not going to happen and probably way overestimates the externality generated by carbon emitted by air travel.  I sometimes buy renewable energy credits to offset my carbon emissions and it costs between 5-20 dollars to offset air travel (I don't remember exactly but its likely on the low end). 

[UK]

https://www.euronews.com/2019/07/10/aviation-tax-which-eu-countries-charge-passengers

 

"Germany. An aviation tax came into effect in 2011 and applies to passenger flights departing from Germany. For destinations in EU member states, EU candidate countries, European Free Trade Association members and third countries within the same distance, the rate is €8. It rises to €25 for destinations under 6,000 km away while it stands at €42 for destinations of more than 6,000 km."

 

https://www.statista.com/statistics/590285/germany-number-air-passengers/

 

So probably mostly recession fears.

 

 

[Gamecock-YT]

The UK already had a departure tax that’s the highest in the world. Flights to the US are around $150. Used to be even more if you had a first/business class ticket.

[StubbleJumper]

The UK already had a departure tax that’s the highest in the world. Flights to the US are around $150. Used to be even more if you had a first/business class ticket.

 

 

And that's the reason why I avoid transiting through Heathrow like the plague.  Frankfurt is only a shade better.  Brussels is a much less costly hub for me.

 

 

SJ

[Castanza]

You didn't hear? 2.5% of global CO2 emission and this has got to stop!

 

Seriously, I think this may start to get some traction in developed countries especially in Europe. I would expect some people to reduce air travel for leisure. More importantly, large corporations are notarious to jump on such things to encourage/make their employees travel less. They did the same thing after 911 as travel costs and time went up.

 

Even if we are just talking 0.5% to 1%, this is a big headwind for a business with high fixed costs and low profit margins. We will see in coming months, years if this happen.

 

Then you have recession fears. Until the recession has passed, whenever it happens, I think you have to expect low valuation. That is how they treat all cyclicals right now or price in the worst now, even if the worst is unknown and even if timing unknown.

 

So you may want to buy this one and short a more expensive one. Or buy it, then sell it whenever it goes up 20%. I would not recommend to just buy and hold as they will likely (algos and hedge funds) take this down lower over time or again until recession hits.

 

Curious to see the long term affects of something like this. Perhaps we would see a revitalization in the "Dirty Dancing" style vacation resorts which people frequented before the consumer airline industry killed it. I doubt it, but who knows.

 

I'm very skeptical of this happening. The younger generations love to travel and selfishness always prevails.

[Spekulatius]

Is AAL cheaper than DAL? I don’t think so, based on the metrics I am seeing, except EV/sales. DAL seems to be much better managed, so why would one chose AAL over DAL at this point?

[cameronfen]

The UK already had a departure tax that’s the highest in the world. Flights to the US are around $150. Used to be even more if you had a first/business class ticket.

 

Keep in mind most of these taxes are for things other than carbon (like airport usage) and have been around for a long time.   

[Spekulatius]

You didn't hear? 2.5% of global CO2 emission and this has got to stop!

 

Seriously, I think this may start to get some traction in developed countries especially in Europe. I would expect some people to reduce air travel for leisure. More importantly, large corporations are notarious to jump on such things to encourage/make their employees travel less. They did the same thing after 911 as travel costs and time went up.

 

Even if we are just talking 0.5% to 1%, this is a big headwind for a business with high fixed costs and low profit margins. We will see in coming months, years if this happen.

 

Then you have recession fears. Until the recession has passed, whenever it happens, I think you have to expect low valuation. That is how they treat all cyclicals right now or price in the worst now, even if the worst is unknown and even if timing unknown.

 

So you may want to buy this one and short a more expensive one. Or buy it, then sell it whenever it goes up 20%. I would not recommend to just buy and hold as they will likely (algos and hedge funds) take this down lower over time or again until recession hits.

 

I would be more concerned about business travel. It’s somewhat discretionary, so it’s one of the first things to go when money gets a bit tight in corporations. In addition, there is a trend to videoconferencing and screen sharing etc.  making remote collaboration easier and at least some travel redundant.

[no_free_lunch]

Maybe it slows down a bit if we hit a recession.  So what, it's like most sectors then.  The flip side is air travel is a secular trend.  As we get richer more and more people will be able to afford it.  There are still large segments of the population where flying is basically out of reach.

[Stuart D]

Is AAL cheaper than DAL? I don’t think so, based on the metrics I am seeing, except EV/sales. DAL seems to be much better managed, so why would one chose AAL over DAL at this point?

 

DAL vs AAL. This is a fun comparison!

 

The top half of their Income statements are very similar. Revenue's are even ($44b), AAL have slightly higher gross margins and SG&A's are even. The bottom half is different,  AAL has a massive "Other Operating Expense" (not sure what's in this bucket), higher interest costs, lower taxes & net income.

 

Cash flow statements is where the real differences are though. Over 2014 - 2018, DAL averaged FCF = $2.8b/yr, compared to AAL's negative Free Cash Flow of -$500m/yr. Both have prioritized returning capital to shareholders. AAL funded their buybacks through asset sales ($2.3b) and raising debt ($6b). DAL funded their's through FCF ($14b).

 

Having said all this, in the 2019 Q2 conference call the AAL CEO said he expects to "generate significant free cash flow in 2020 and 2021." How much is "significant"? I don't know. Also, the AAL fleet has an average age of 10.6yrs, compared to DAL's 16 years. Average fleet ages have remained relatively constant for both DAL and AAL over the past 5 years, so I'm not sure how much this affects valuation.