American Airlines Group Inc (NASDAQ:AAL) is a not-so-new company with a new lease on life.
AAL is the result of a merger between American Airlines and US Airways — one that many viewed as a reprieve for American, which filed for bankruptcy in 2011. But it also was understood that the new company was not completely out of the woods.
Why the concern? Merged airlines are notorious for not living up to their potential the first couple years out the gate. This is due to difficulties that go along with blending companies so dependent on precise scheduling, potential computer glitches, the possibility of flight delays and other issues.
However, it looks like AAL is weathering the storm (and will continue to) much better than most anticipated. Here are four reasons why American Airlines likely has more smooth skies ahead, and why AAL stock is cleared for another takeoff.
American and US Airways Pilots Have a Contract: One difficult thing for merged airlines and other companies to overcome the first couple years is the integration of company “cultures.” Last month, AAL made a significant step to overcome this obstacle late last month when the pilots of the two merged companies agreed to a joint contact.
The new contract means the pilots will be able to avoid arbitration — a process that would’ve been less expensive for AAL but likely would’ve upset the pilots. And the last thing an airline company wants are upset pilots.
AAL Is a Bargain Right Now: When compared to other airline stocks, AAL is a clear winner as far as valuation is concerned. AAL trades at 13 times trailing earnings and 6 times next year’s estimates, meanwhile, you’re looking at 24 and 6 for United Continental Holdings Inc (NYSE:UAL), 27 and 12 for Southwest Airlines Co (NYSE:LUV) and 60 and 8 for Delta Air Lines, Inc. (NYSE:DAL).
AAL Had a Positive Fourth Quarter: American Airlines beat analysts’ estimates for the fourth quarter. American reported adjusted profits of $1.1 billion, up 153% year-over-year. On a per-share basis, earnings of $1.52 edged out estimates for $1.51. Revenues of $10.2 billion also just cleared the analyst bar.
American’s positive fourth quarter sparked analysts to improve their price targets. Analysts at CRT Capital raised their price target from $59 to $63, Barclays raised its target from $63 to $68, and Imperial Capital gave AAL stock a $92 price target.
AAL Policies Are Beneficial to Shareholders: Unlike other airlines, AAL has a no-hedging policy for fuel costs. And with oil prices as low as they’ve been in decades, American Airlines’ policy appears to be paying off. American Airlines also is increasing shareholder value through share repurchases. AAL has already repurchased more than $1 billion in shares and plans to repurchase another $2 billion by the end of 2016.
Bottom Line
The newly formed AAL, an airline with a storied history dating all the way back to Charles Lindbergh, will most likely face some turbulence as it deals with the challenges of integration.
But most indicators point to AAL stock being a winner in the longrun.
As of this writing, Will Emerson did not hold a position in any of the aforementioned securities.
