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What Is Up At American Airlines?

|Includes: American Airlines Group (AAL)

This is one of the more maligned members of the airline industry. The world's largest airline by most measures, AAL continues to encounter turbulence in the not-so-clear market skies. While many are enthusiastic about the prospects for the $26.8B company that swallowed rival U.S. Airways last year, I'm less eager. I owned the stock at higher levels, and for the current time period, I am out of the stock.

Expense:

2015

 

2014

 

YOY

Fuel

1,544

17.9%

 

2,711

29.3%

 

-43.0%

Salary

2,373

27.6%

 

2,119

22.9%

 

12.0%

Regional

1,462

17.0%

 

1,594

17.2%

 

-8.3%

MRO

494

5.7%

 

485

5.2%

 

1.9%

Landing Fees

408

4.7%

 

424

4.6%

 

-3.8%

Aircraft Rent

317

3.7%

 

320

3.5%

 

-0.9%

Selling expenses

336

3.9%

 

401

4.3%

 

-16.2%

Depreciation

336

3.9%

 

307

3.3%

 

9.4%

Special Items

303

3.5%

 

(137)

-1.5%

 

-321.2%

Other

1,038

12.1%

 

1,041

11.2%

 

-0.3%

 

8,611

   

9,265

   

-7.1%

The company received a strong tailwind during Q1 2015 as the airline famous for not hedging exposure to commodities profited from the plummeting price of oil. While they will receive similar support from the oil side of the equation, a disturbing trend is taking root at the airline:

Revenue:

 

2015

 

2014

 

Y/O/Y

Mainline

 

6,989

 

7,258

 

-3.71%

Regional

 

1,452

 

1,407

 

3.20%

Cargo

 

194

 

206

 

-5.83%

Other

 

1,192

 

1,124

 

6.05%

   

9,827

 

9,995

 

-1.68%

Competition is eating AAL's lunch! Trendy low-cost carriers like Allegiant and JetBlue are stealing market share from the giant and revenues are sliding due this fact. Revenues during the first quarter were down by -1.68% and the main driver behind the trend is that consumers are flying elsewhere (when they can). An older fleet and less enthusiasm around the DFW based airline will keep this company grounded in the eyes of consumers. As if this all weren't terrible enough news, take a look at the following chart for more bad news:

 

2014

 

2013

   
 

Core

Merger

Compare

 

Compare

   

Mainline

30,802

9,833

20,969

 

20,218

 

3.7%

Regional

6,322

3,207

3,115

 

3,131

 

-0.5%

Cargo

875

149

726

 

685

 

6.0%

Other

4,651

1,318

3,333

 

2,709

 

23.0%

 

$ 42,650

 

$ 28,143

 

$ 26,743

 

5.2%

The only section of the 2014/2013 revenues that is overwhelmingly positive (enough to make someone not in the stock want to get in on the action) is the section titled 'Other.' The 'Other' section exploded upward 23% during 2014, while cargo (a very small part of the overall business) also grew at a healthy 6% clip over the same period. Upon further examination one will find that this catch-all category is rife with revenue that one doesn't typically get excited about-unless your name is Howard Schultz. Like all major travel companies, AAL has an active and robust customer loyalty program and this makes up the majority of the 'Other' section. While CRM is a major buzzword among the marketing elite right now, I personally have a difficult time getting excited about the company's only strong source of revenue growth-in the face of an $11B merger to acquire U.S. Airways-coming from a co-brand agreement with Citigroup. Even worse, customer loyalty programs add an additional liability onto a company's balance sheet that can quickly grow very large. The risks will surely be maintained, but the fact that the company only grew revenues by 3.2% last year when one back's out the loyalty program component-yes, that's right folks, 40% of all growth was a co-brand credit card agreement in the face of adding on tremendous scale-Is a terrible sign.

My prediction says that AAL, which closed at $38.80 today will see $28.80 before it sees $48.80…too much competition, lower revenues per available-seat mile, and never-ending rises in labor costs are going to keep AAL from soaring higher in the short to medium term.

  2014   2013
Mainline: Raw Dpt. Total   Raw Dpt. Total
Fuel 10,592 33.2% 27.6%   7,839 35.6% 30.9%
Labor 8,508 26.7% 22.2%   5,460 24.8% 21.5%
Maintenance 2,051 6.4% 5.3%   1,260 5.7% 5.0%
Rent/ Landing Fees 1,727 5.4% 4.5%   1,152 5.2% 4.5%
Aircraft Rent 1,250 3.9% 3.3%   768 3.5% 3.0%
Selling Expenses 1,544 4.8% 4.0%   1,158 5.3% 4.6%
Depriciation 1,295 4.1% 3.4%   853 3.9% 3.4%
Special Items 800 2.5% 2.1%   559 2.5% 2.2%
Other 4,118 12.9% 10.7%   2,969 13.5% 11.7%
Mainline total: 31,885       22,018 44.8%  
               
Regional:              
Fuel 2,009 30.8% 5.2%   1,120 33.7% 4.4%
Other 4,507 69.2% 11.7%   2,206 66.3% 8.7%
Regional total: 6,516       3,326    
               
Total $ 38,401       $ 25,344 51.5%  

* All information taken from $AAL 10-K statements.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AAL over the next 72 hours.