American Airlines: Capacity Constraints Moderate Earnings Growth

DALLAS, TX - SEPTEMBER 21, 2017: An American Airlines Boeing 737 passenger jet taxis at the Dallas/Fort Worth International Airport, located roughly halfway between Dallas and Fort Worth, Texas. (Photo by Robert Alexander/Getty Images)

The last major network carrier to go through a merger, American Airlines Group Inc. (NASDAQ: AAL), the holding company of American Airlines, Inc. have seen worst of the times lately. Unlike its peers, United Continental Holdings, Inc. (NASDAQ: UAL) and Delta Air Lines Inc. (NYSE: DAL), AAL’s share price has declined during the year. The number two US carrier in terms of market share, AAL, currently trading at a significant discount to the average forward PE of its peers, is troubled by poor margins and slow revenue growth.

The company’s top-line growth will slow even more as capacity constraints mount following the suspension of the Boeing Company (NYSE: BA)-manufactured 737 Max aircraft. Despite revenue and cost benefits of USD1.3 bn projected for 2019E, AAL’s stock price only yields a modest upside, even after applying the most favorable forward PE. However, the company is steaming ahead with its revenue initiatives at its most profitable hubs, while softening fuel prices and fleet simplification drive are expected to bring in better profitability. If those catalysts could moderate the pressure on EPS growth, the upside potential of the stock would remain even through the Max impact.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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