American Airlines (
) recently announced its Q2 2011 results posting a higher net loss
of $286 million compared to a $11 million loss the previous quarter
primarily due to the growing burden of rising jet-fuel prices.
While these results are disappointing, we believe that in the
medium-term American will reign in the costs and benefit from
growing demand for air travel and an improving macro environment.
It announced several immediate measures to reduce costs and improve
revenue performance that include the cancellation of some
unprofitable routes and a major renewal of its fleet. American
Airlines is one of the largest passenger airline in the world by
available seat miles and is the principal subsidiary of the AMR
) and competes with
), Southwest Airlines (
We have a $6.70 price estimate for American Airlines, which
is about 30% ahead of the current market price.
Higher fares boost revenues, but high fuel costs cause
Although American's revenues for the quarter increased 8% due to
increased fares, its performance was negatively affected by fuel
costs that rose to more than half a billion dollars during the same
period. Despite fuel hedging, AMR's fuel prices increased 31%
compared to Q2 2010.
While available seat miles (ASM) increased slightly with
selective capacity addition, the passenger revenue per
available seat mile (PRASM) grew by 5%. This was due to the trend
of rising average fares that increased 5% during the quarter. For
2011, AMR expects its ASMs to increase 2.6% and an average fuel
price of $3.06 per gallon. This compares to an average fuel price
of $2.32 per gallon in 2010.
Major fleet agreements with Boeing and Airbus to
Under the new agreements, American will acquire 460
narrow-body aircraft from the Boeing 737 and Airbus A320
families beginning 2013, making it the largest aircraft order in
aviation history. These new aircraft with state-of-the-art
amenities will allow American to reduce its operational costs and
fuel expenses leading to better seat mile economics and performance
These deliveries will provide American with the
youngest and most fuel-efficient fleet among its U.S. airline
peers in about five years. The agreement is also likely to benefit
the company with approximately $13 billion of committed financing
from the manufacturers through lease transactions, and this
will help maximize balance sheet flexibility and reduce risk.
See our complete analysis of American