American Airlines is the largest U.S.-based carrier by capacity

Business Strategy & Outlook

American Airlines is the largest U.S.-based carrier by capacity. Before the coronavirus pandemic, much of the company’s story was based on realizing cost efficiencies from its transformational 2013 merger with U.S. Airways and strengthening its hubs to expand margins. While American Airlines has done a good job at limiting unit cost increases, it has been noted that the firm lagged peers in unit costs over the previous aviation cycle. Management sees the pandemic crisis as an opportunity to structurally improve the firm’s cost position relative to peers. The American will become more efficient from the crisis, but one cannot be as confident that it will improve its relative position among airlines. In the leisure market, the low-cost carriers prevent American Airlines from increasing yields with inflation. While the American’s basic economy offering effectively serves the leisure market, one doesn’t expect the firm to thrive in this segment. It is expecting a leisure-led recovery in commercial aviation, reflecting customers being more willing to visit friends and family and vacation in a pandemic than they are to go on business travel.

The American Airlines will participate in the recovery of business and international leisure travel now that a vaccine for COVID-19 is available. A recovery in business travel will be critical for American, as the firm’s high-margin frequent-flier program is closely tied to business travel. Business travelers will often use miles from a co-branded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks pay top dollar for frequent-flier miles, which gives American a high-margin income stream. The COVID-19 pandemic presented airlines with the sharpest demand shock in history, and much of is based on assumptions around how illness and vaccinations affect society. A full recovery in capacity and an 80%-90% recovery in business travel that subsequently grows at GDP levels over the medium term. Air travel demand has recovered sharply, but labor constraints have prevented airlines from fully meeting demand.

Financial Strengths

American is the most leveraged U.S.-based major airline due to its fleet renewal program and the COVID-19 pandemic. As the pandemic wreaked havoc on air travel demand and airlines’ business model, liquidity became more important in 2020 than in recent years. American Airlines, more than peers, increased leverage and diluted equity during the pandemic. The American Airlines’ comparably higher financial leverage will make it difficult for the firm to maneuver going forward, and that management will have few capital allocation options other than deleveraging post-pandemic. American Airlines came into the crisis with considerably more debt than peers, with gross debt/EBITDA sitting at roughly 4.5 times in 2019. American ended 2021 with $38.1 billion of debt and $13.4 billion of cash. It will use incremental free cash flow to deleverage after the crisis. The EBITDA expansion and debt reductions will reduce gross debt/EBITDA to roughly 2-3 turns in the 2025-26-time frame. The firm has $2.6 billion of debt coming due in 2022, and it will use cash on the balance sheet to pay that.

Bulls Say

American Airlines has the youngest fleet among U.S. major airlines, which should damp fuel expense and maintenance going forward.
American Airlines has largely completed its fleet renewal, which should decrease capital expenditures going forward.
Demand for air travel has recovered sharply from the COVID-19 pandemic.

Company Description

American Airlines is the world’s largest airline by scheduled revenue passenger miles. The firm’s major hubs are Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C. After completing a major fleet renewal, the company has the youngest fleet of U.S. legacy carriers.

(Source: Morningstar)

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