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Adam Levine-Weinberg  

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  • American Airlines Group: The Market's Most Hated Stock? [View article]
    I think we are basically on the same page. What I was originally trying to state was that analysts' estimates in various databases are based on accounting earnings, not cash earnings. As a result, the 2016 estimates for AAL are not all comparable to one another, because some analysts appear to be assuming no taxes while others are building in a normal tax rate for accounting purposes in their estimates. Everybody agrees that the cash tax rate is effectively zero in 2016.

    By January we will find out whether management is reversing the valuation allowance, and I'd expect the analysts' estimates to move closer to one another at that point.
    Jul 30, 2015. 04:24 PM | Likes Like |Link to Comment
  • American Airlines Group: The Market's Most Hated Stock? [View article]
    @markcc: That's not how the accounting works. There is a big gap between when an airline reverses its valuation allowance and starts booking taxes in its earnings statements and when it actually starts paying cash taxes to Uncle Sam. For example, Delta reversed its valuation allowance at the end of 2013 based on its profit trends, but it hasn't paid cash taxes yet and isn't likely to pay until 2017 or 2018, even at current profitability. US Airways started booking taxes during 2013 even though it wasn't paying any cash taxes, and then it stopped after the merger with American because it added a whole new pile of losses.

    The key point here is that it is relatively straightforward to calculate when an airline might start paying cash taxes based on how large its net operating loss position is. (Even then, it's not as simple as it seems, because if you're buying a lot of planes you can defer quite a bit of tax with accelerated depreciation.) But it's even more complicated to determine when to start booking taxes. As I stated before, I think AA will probably start booking taxes next year. However, considering its existing NOLs and how much it's spending on CapEx, it won't be paying cash taxes for a few more years.
    Jul 30, 2015. 02:06 PM | 1 Like Like |Link to Comment
  • American Airlines Group: The Market's Most Hated Stock? [View article]
    @markcc: Analysts have taken a variety of approaches in accounting for the tax benefit. Many of them just focus on the cash impact, which won't be felt until later than the accounting impact.

    On the accounting side, there's a significant subjective component to deciding when to reverse a tax valuation allowance and start accruing taxes again. I am pretty sure that some analysts' models assume that is going to occur for 2016, while others won't factor that into their EPS estimates until American Airlines confirms that it is reversing the valuation allowance. Otherwise, it's hard to understand why there's a more than 100% spread between the lowest and highest analyst estimates for 2016. ($4.40 and $9.06, according to Yahoo Finance.) I think they're just comparing apples and oranges.

    My point was just that if you're basing a valuation off of forward earnings estimates, it's important to recognize that the estimates aren't all treating the tax issue the same way.
    Jul 27, 2015. 03:55 PM | 1 Like Like |Link to Comment
  • American Airlines Group: The Market's Most Hated Stock? [View article]
    I agree that AAL is undervalued. To those who say that you can't fight the market, it's all a matter of your mindset and time horizon. If your goal is to make a big profit in the next few months, then sure, you can't fight the market. But if you're willing to wait a few years to get rewarded, of course you can fight the market. And meanwhile, AAL is helping with its big buyback program.

    There was a time not that long ago when most airline stocks were trading for 4X earnings. Sometimes, it seemed like that was just all that investors were willing to pay for airline stocks and you couldn't "fight the market". That was true until it wasn't true anymore... and then all the airlines skyrocketed. Personally, I'd rather own the stocks if I believe in their long-term potential over attempting to time the market.

    One technical point: I'm not sure how reliable the forward earnings numbers are because of American's tax situation. Right now, the company still isn't accruing any taxes, but it may start accruing taxes for accounting purposes in 2016 (and almost certainly by 2017). That would cause an immediate 35%-40% hit to EPS, all else equal. The cash impact wouldn't come until a few years later, though, mainly because of accelerated depreciation on all of AAL's jet purchases.
    Jul 26, 2015. 11:08 PM | 2 Likes Like |Link to Comment
  • American Airlines: Expanding Network In China And Modifying Its Fleets [View article]
    I didn't say it was a mistake. I said it was necessary to expand the network and win corporate travelers over time. However, it's very normal for new airline routes to take a year or two to reach profitability, and I don't think this one will be any different.

    American's unit cost (CASM) was a little over $0.13 last year, excluding special items. For a long-haul transpacific flight like Hong Kong, the unit cost would be lower: maybe $0.11. (Obviously, that's just an estimate, but I think it's a reasonable one.) This summer, flights are selling for around $1600 roundtrip: that's a little under $0.10 in PRASM. Move forward to September and the fare is around $1200 roundtrip: down to 7.5 cents.

    Obviously there are some people who buy refundable tickets, and some who will buy a business class or first class ticket. And there is some cargo revenue, but that's a small fraction of the total revenue for any flight. (Airline capacity between the U.S. and Asia has been rising rapidly in the last few years, which has pushed down cargo yields significantly. Just look at United's cargo revenue results in the last couple of years.) On the flip side, no route has a 100% load factor.

    The bottom line is that I don't think American is defining success on these routes as having a 15% profit margin in the first year. If they can make some money in the summer and not lose too much more in the winter, while gaining some market share for U.S.-Asia travel, I think Doug Parker and company will be happy. I think your Wal-Mart toothpaste analogy might be closer to the truth than you suspect!
    Mar 14, 2014. 03:25 PM | 1 Like Like |Link to Comment
  • American Airlines: Expanding Network In China And Modifying Its Fleets [View article]
    This idea that any Asian/US market will make money is completely false. It is incredibly expensive to operate these flights (Dallas to Hong Kong is more than 8,000 miles; this flight will likely use over $100K of fuel each way). US-China freight capacity has exploded in recent years and cargo yields have dropped significantly. Cargo is still a source of ancillary revenue, but these flights have to make their money with high yields.

    I see the new Hong Kong and Shanghai flights as network driven -- to win corporate accounts, American needs to have more flights to China. In that sense, they should hopefully contribute to long-term profitability. In the near term, both flights are likely to lose money.
    Mar 12, 2014. 04:12 PM | Likes Like |Link to Comment
  • US Airways Investors Hoping For Merger Bailout May Be Disappointed [View article]
    I don't know about timeframe, but I agree that a settlement is the most likely outcome, with AA/US giving up slots and gates at National and not much else.

    I wouldn't be all that surprised to see LCC stock rally if the merger is approved. However, I think the stock is already trading for at least fair value, if not more. $40 seems highly unlikely, not just in 2014, but for the next several years. That would put AAG's market cap at nearly $30 billion, well ahead of where Delta sits -- and AAG is starting from a worse position in terms of profitability and has more execution risk.

    Here are just a few of the challenges AAG will face, aside from the normal integration issues: 1) big increase in transcon competition from JetBlue's "Mint" product, 2) Big increase in Southwest's capacity in Dallas by 2015 (particularly in major markets like NYC, DC, LA, SF, Chicago, etc.) due to repeal of Wright Amendment, 3) fare wars at DCA depending on how many slots are divested, 4) over-reliance on 50 seat and smaller aircraft as Delta quickly upgauges to lower CASM aircraft; 5) Delta-Virgin joint venture makes London-NY more competitive.

    There will obviously be some revenue synergies from the bigger network and labor cost increases should be fully offset by other cost savings. But I still expect pretax earnings per share of the merged entity to be below what LCC is currently making, at least for the next few years.

    On top of that, American has a crazy fleet growth plan that creates fairly significant risks later this decade.

    Oct 27, 2013. 06:21 PM | Likes Like |Link to Comment
  • American Airlines Shares Keep Climbing Higher After Recovering From A Near-Fatal Tailspin [View article]
    Thanks for the article. I don't think there will be as much left for equity holders as you assume. I'm not sure where you got the $3.5 billion figure for unsecured claims: the most recent figure that I've seen (from last week) estimates all the claims, including labor, at $7.3 billion. See p. 486.

    There's also a handy-dandy chart on that page laying out estimated recovery scenarios. Even at $20 for US Airways/AAG, AMR shareholders would only get about $9 of value. That drops off quickly: if the new company is valued at $16/share (approximately $12 billion), AMR shares would be worth less than $3.

    Jun 6, 2013. 08:45 PM | Likes Like |Link to Comment
  • US Airways Investors Hoping For Merger Bailout May Be Disappointed [View article]
    I'm not sure there's any point in discussing this further. My airline investments as a whole (HA and DAL) outperformed LCC since July 13, and since this article was published in early December. But there's nothing wrong with us both making money!

    Obviously, HA took a beating in January/early February, but I had actually taken profits on half of my position when it was closing in on 7. I'm looking to expand that position again, and I do think it's a much better long-term investment than LCC/American, for reasons that I've elaborated elsewhere.
    Mar 23, 2013. 11:53 AM | Likes Like |Link to Comment
  • US Airways Investors Hoping For Merger Bailout May Be Disappointed [View article]
    Thanks for the comments. LCC is up about 35% since I wrote this post, but I would still argue that my thesis was correct. LCC dropped after the initial merger announcement, and indeed since Dec. 2 (when this piece was published) DAL is up about 75% and UAL is up 65%. So what's happened is simply that the valuation of the entire industry has gone up.

    I've been bullish on airlines for two years, and have been long at least one airline stock for that entire period of time (and I went long LCC back when it was sub $5, but took profits too early; don't see how I could have an "inherent bias" against the stock). I am surprised at how fast sentiment has changed on airlines; I think some of the lower performing airlines (United and possibly also the new American) are due for a correction. On the other hand, I think Delta may have a little more room to go.

    P.S. As mitchad1 said, I'm writing for Motley Fool now, but I still do check comments here from time to time.
    Mar 22, 2013. 07:39 PM | Likes Like |Link to Comment
  • AMR Shares Are Still Fool's Gold [View article]
    That's not any different than a leased airplane, for instance. If American wants to get rid of the plane, it can reject the lease, and the lessor could repossess the plane and file a claim for any resulting losses. Alternatively, American could keep the plane.

    In this situation, I think the responsibility for the airport debt is tied to American's leases at DFW. As long as American keeps the leases, DFW won't have a claim (because it won't have a loss). I imagine the contract was written so that DFW would be protected in the event that American used bankruptcy to reject its leases at DFW and downsize there. That's not going to happen, though
    Jan 15, 2013. 10:30 AM | Likes Like |Link to Comment
  • AMR Shares Are Still Fool's Gold [View article]
    I understand that, but can't the "new" American just assume the liability? If they didn't, I think they would lose their space at DFW.
    Jan 15, 2013. 09:02 AM | Likes Like |Link to Comment
  • AMR Shares Are Still Fool's Gold [View article]
    DFW is American's biggest hub, so I can't see the airline scaling back there. I'm pretty sure that there would only have been a liability there if AMR had moved to terminate/restructure its leases at DFW.
    Jan 14, 2013. 09:44 AM | Likes Like |Link to Comment
  • AMR Shares Are Still Fool's Gold [View article]
    The unsecured creditors are getting stock in the new company. That's what settles their claims.
    Jan 14, 2013. 08:27 AM | Likes Like |Link to Comment
  • US Airways Investors Hoping For Merger Bailout May Be Disappointed [View article]
    They will almost certainly be canceled. In other words, they are probably worthless. Once American went into bankruptcy, the creditors (holders of the company's debt) have a prior claim to all of the company's assets. Shareholders would only get something if American could somehow pay off all of its debts and still have money left over.
    Dec 9, 2012. 10:00 AM | Likes Like |Link to Comment
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