December 2, 2009
Research Analyst: Sweta Killa, M. Fin.
Sr. Ed.: Ian Madsen, CFA: ; 1-800-767-3771 x9417
111 N. Canal Street, Suite 1101Chicago, IL60606
AMR Corporation
/ (AMR-NYSE) / $6.79Note: More details to come; changes are highlighted. Except where highlighted no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: American, partners eyeing Japan Airlines
Prev. Ed.: Oct.28;3Q09 Earnings Update (brokermaterial considered till Oct. 28)
Flash News Update
On December 2, 2009, American Airlines announced that it and its alliance partners along with private equity firm TPG are willing to invest $1.1 billion in Japan Airlines. Japan Airlines, which is facing bankruptcy, is also being pursued by American’s rival Delta Airlines (DAL). Delta has said that it and other SkyTeam members are ready to offer JAL a total of about $1 billion in financial aid package to bring the ailing airlines back on solid footing.
MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTS ON AMR.
Portfolio Manager Executive Summary[Note: Only highlighted material has been changed.]
AMR Corporation (AMR or the Company) operates primarily in the airline industry through its principal subsidiaries, American Airlines, Inc,AMR Eagle (a wholly-owned regional airline subsidiary), and American Beacon Advisors (a wholly-owned provider of investment advisory services to individual and institutional clients). The Company provides scheduled jet service throughout North America, the Caribbean, Latin America, Europe, and Asia.
Of the seven firms covering the stock, four gave positive ratingsand three gave neutral ratings. None of the firms gave a negative rating. The firms expect a return of 96.7%. Out of five firms providing target prices, four firms provided valuation metrics to derive the target price based on EV/EBITDAR.
Bullish: Buy or equivalent outlook (4/7 firms): Target prices range from$10.00-$14.00: These firms believe that the Company has ample liquidity, significant unencumbered assets, and has significantly reduced its net debt. According to the firms, the Company maintains a disciplined approach toward capacity growth. The firms expect the Company to show improved stock price performance when the economy recovers.
Cautious: Neutral or equivalent outlook (3/7 firms):One firm gave a target price of $8.00: According to these firms, the company has adequate cash over 2010 following consecutive liquidity enhancement transaction. The firms stated that they do not have fear of a liquidity crisis following the flurry of financings, which raised $5.0 billion in cash and funding for new aircraft deliveries. However, they see company-specific risks at AMR that does not apply to other network airlines, including an uncertain outcome relating to AMR's oneworld antitrust immunity (ATI) application and continuing labor unrest that is particularly vitriolic, even relative to other airlines.
Key factors for determining an investment strategy for AMR are as follows:
- AMR is the holding company for American Airlines. It is the second largest scheduled passenger airline based in the United States.
- AMR has one of the better revenue management groups in the industry focused on improving unit revenues regardless of the economic backdrop.
- Some of its main competitors are Delta Air Lines, Northwest Airlines, and UAL Corporation.
- AMR’s market share trends in non-hub markets have deteriorated significantly given aggressive low-cost carrier growth, particularly at Boston, JFK, St. Louis, and the wider San Francisco market, which are all important business travel markets.
General Outlook
The Company is experiencing significantly weaker demand for air travel driven by the severe downturn in the global economy. The Company implemented capacity reductions in 2008 and in 1Q09 in response to record high fuel prices. Those capacity reductions have somewhat mitigated this weakening of demand, and in June 2009, the Company announced additional capacity reductions in a further effort to balance supply and demand. However, if the global economic downturn persists or worsens, demand for air travel may continue to weaken. No assurance can be given that capacity reductions or other steps the Company may take will be adequate to offset the effects of reduced demand. In addition, fare discounting has recently been both broader and deeper than usual, and the Company expects downward pressure on passenger yields in 4Q09 and beyond. In addition, the global economic downturn, rising fuel prices, the possibility of being required to post reserves under credit card processing agreements, and the obligation to post cash collateral on fuel hedging contracts, among other things, may in the future negatively impact the Company’s liquidity.
As per the Zacks Digest model, EPS is expected to decrease 4.5% and 2.3% in FY09 and FY11, respectively,but increase 73.3% inFY10. Fuel expenses are expected to decrease39.3% in FY09,but increase1.6% and 17.6% in FY10 and FY11, respectively.
October28, 2009
Recent Events[Note: Only highlighted material has been changed.]
On October 28, 2009, AMR announced that it will eliminate up to 700 jobs as it downsizes its maintenance and engineering operations. The Company said it would wind down all operations at its Kansas City Maintenance Base in 2010 after it closes the location in September. The changes will affect operations in other locations throughout its system, including the St. Louis line operations, which will be downsized and cause a reduction of 700 positions. Of the 700 job cuts mentioned, 490 of the staffing reductions will occur at the Company's Kansas City base. About 358 of those impacted in Kansas City are union members. The remaining cuts will come from other American Airlines bases in San Francisco, Minneapolis, Detroit and San Jose, California.
On October 21, 2009, AMR announced its 3Q09 earnings results. Highlights are as follows:
- Total revenue was $5,126.0 million versus $6,421.0 million in 3Q08.
- PRASM (unit revenue) decreased 14.5% y/y.
- Available seat miles (ASM) decreased 13.5% y/y.
- GAAP loss per share was $1.26 versus an EPS of $0.12 in 3Q08.
On October 9, 2009, AMR completed the offering of $450.0 million aggregate principal amount of its 10.5% senior secured notes due 2012 (the Senior Notes), which are guaranteed by AMR as announced on September 25, 2009. The Senior Notes are secured by certain of American’s aircraft, and proceeds from the offering of the notes were used to refinance American’s $432.0 million term loan credit facility, which had a scheduled maturity of December 17, 2010 and which was retired early on September 28, 2009.
On September 28, 2009, AMR announced the completion of its offerings of 48,484,849 shares of its common stock and $460,000,000 principal amount of its 6.25% convertible senior notes due 2014.
On September 17, 2009, AMR announced that it raised $2.9 billion in cash and fresh financing to bolster its balance sheet. AMR said the extra funding that it raised includes $1.0 billion from the advance sale of frequent flyer miles to a New York-based investment bank. The Company said it raised another $1.6 billion through a sale-leaseback financing commitment from GE Capital Aviation Services and $280.0 million in secured loan, also from GE Capital Aviation Services.
On September 1, 2009, AMR announced that it is cutting 921 flight attendant jobs as it deals with an ongoing downturn in traffic and lower revenue. The airline said that the cuts will reduce its flight-attendant ranks by about 6.0%. It announced that 228 employees will be furloughed and the Company will put 244 more on leave for two months. Another 449 will take voluntary options such as leave.
On August 20, 2009, AMR announced that it expanded its in-flight Internet service to more aircraft. The airline has now made the Wi-Fi service available on 100 MD-80 aircraft, which is two-thirds of the 150 Gogo installations scheduled to be completed by the end of 2009. The Company plans to expand Internet access to about half its fleet of aircraft over the next two years.
On August 19, 2009, AMR announced a three-year, integrated, marketing partnership with the New England Patriots of the National Football League and the New England Revolution of Major League Soccer. The agreement establishes American as the Official Airline and the Official Sponsor of both teams and of Gillette Stadium. Terms of the contract were not disclosed.
Overview[Note: Only highlighted material has been changed.]
Based in Fort Worth, Texas, AMR Corporation (AMR or the Company) is the holding company for American Airlines (AA), and AMR Eagle (a wholly-owned regional airline subsidiary). The Company, through its principal subsidiary, American Airlines, Inc., provides scheduled jet service to approximately 150 destinations throughout North America, the Caribbean, Latin America, Europe, and Asia. American Airlines also operates as a scheduled air freight carrier, providing a range of freight and mail services to shippers throughout its system. In addition, the Company through its subsidiary AMR Eagle Holding Corporation owns and operates two regional airlines, providing connecting service from nine of American's high-traffic cities to smaller markets throughout the United States, Canada, Mexico, and the Caribbean under the name American Eagle. The Company serves 250 cities in 40 countries with approximately 3,400 daily flights.
The analysts have identified the following factors for evaluating the investment merits of AMR:
Key Positive Arguments
/Key Negative Arguments
- Compelling Fundamentals: AMR has a good brand identity, an excellent Frequent Flyer program, and regularity of service in key markets.
- Solid Capital Structure: AMR has a large cash position, good free cash flow generation, hidden assets, and a focused, financially oriented management team.
- Networking: AMR has one of the most powerful route networks in the world. Latin America, an AMR stronghold, is holding up better than the Pacific and Atlantic in the current economic environment, giving AMR an edge.
- Aircraft Fuel: The Company’s earnings are affected by changes in the price and availability of aircraft fuel.
- Crude Oil Prices and Jet Fuel Prices: Fluctuation of crude oil and jet fuel prices with news of geopolitical events as well as hurricanes, floods and other issues disrupting petroleum supplies will impact share prices of airlines.
- Competition: Competition in the American airline industry is intense.
- Macro Risks: An adverse macroeconomic development would hurt air traffic, particularly domestic leisure demand. Significant international exposure and swine flu also pose risk for the Company.
For more information on the Company, please visit its website:
Note: AMR’s fiscal year coincides with the calendar year.
October 28, 2009
Revenue[Note: Only highlighted material has been changed.]
According to the Zacks Digest model, 3Q09 total revenue was $5,126.0 million (inline with the press release), down 20.2% y/y but up4.8% q/q from $6,421.0 million in 3Q08 and $4,889.0 million in2Q09 largely driven by reduced capacity and the reduced demand for air travel and cargo resulting from the global economic downturn.
Provided below is a summary of revenue as compiled by Zacks Digest:
Total Revenue ($ in million) / 3Q08A / 2008A / 2Q09A / 3Q09A / 4Q09E / 2009E / 2010E / 2011EZacks Consensus / $4,861.0 / $19,658.0↑ / 21,118.0
Digest High / $6,421.0 / $23,766.0 / $4,889.0 / $5,126.0 / $4,999.0 / $19,853.0↑ / $21,725.0↓ / $22,665.0↓
Digest Low / $6,421.0 / $23,766.0 / $4,889.0 / $5,126.0 / $4,841.0 / $19,695.0↑ / $21,118.0↑ / $22,665.0↑
Digest Average / $6,421.0 / $23,766.0 / $4,889.0 / $5,126.0 / $4,920.0 / $19,774.0↑ / $21,421.5↓ / $22,665.0↑
Y/Y Growth / 8.0% / 3.8% / -20.9% / -20.2% / -10.0% / -16.8%↑ / 8.3%↓ / 5.8%↑
Q/Q Growth / 3.9% / 1.0% / 4.8% / -4.0%
The operational performance of the Company is as follows:
American's mainline passenger revenue per available seat mile (PRASM) (unit revenue) declined by 14.5%y/y in 3Q09. While this reflects a challenging economic environment, the Company believes the strength of its network and its efforts to drive a revenue premium have helped its mainline unit revenue performance outpace that of several of its legacy network competitors throughout 2009.
Mainline capacity or total available seat miles (ASM) decreased by 8.2% y/y in 3Q09 as the Company continued to exercise capacity discipline given the difficult demand environment.
The Company expects mainline capacity to be down approximately 6.0% y/y with domestic capacity to be down by approximately 5.0%y/y and international capacity tobe down by approximately 7.5% y/y in 4Q09. It expects its 2009 mainline capacity to decrease by approximately 7.5% y/y, with a reduction of domestic capacity of approximately 9.0% y/y and a reduction of international capacity of approximately 5.0% y/y.
The Company expects consolidated capacity to decrease by approximately 5.5% y/y in 4Q09. On a consolidated basis, it expects 2009 capacity to decrease by approximately 7.5% y/y.
One firm (BofA Merrill Lynch) stated that if the economy picks up in 2010, it will likely be due to higherfuel prices. As such, capacity growth in 2010 is expected to be only about 1.0%, mainly due to mainline domestic being flat and international up 3.0%. Internationalcapacity is largely up because of the return of Mexico flying due to the temporary pulldownrelated to H1N1 influenza and the deferral of the Chicago – Beijing start date from2009 to 2010.
Provided below is a summary of revenue by segment as compiled by Zacks Digest:
Segment Revenue ($ in million) / 3Q08A / 2008A / 2Q09A / 3Q09A / 4Q09E / 2009E / 2010E / 2011EPassenger Revenue - American Airlines / $4,946.0 / $18,234.0 / $3,677.0 / $3,882.0 / $3,666.5 / $14,905.5↑ / $16,319.0↓ / $17,324.0↑
As % of Total Revenue / 77.0% / 76.7% / 75.2% / 75.7% / 74.5% / 75.4% / 76.2% / 76.4%
Passenger Revenue - Regional Affiliates / $668.0 / $2,486.0 / $513.0 / $523.0 / $527.5 / $2,020.5↓ / $2,141.0↓ / $2,273.0↑
As % of Total Revenue / 10.4% / 10.5% / 10.5% / 10.2% / 10.7% / 10.2% / 10.0% / 10.0%
Cargo / $230.0 / $874.0 / $134.0 / $136.0 / $169.5 / $583.5↑ / $605.5↓ / $640.0↑
As % of Total Revenue / 3.6% / 3.7% / 2.7% / 2.7% / 3.4% / 3.0% / 2.8% / 2.8%
Other / $577.0 / $2,172.0 / $565.0 / $585.0 / $556.0 / $2,264.0↓ / $2,356.0↓ / $2,428.0↑
As % of Total Revenue / 9.0% / 9.1% / 11.6% / 11.4% / 11.3% / 11.4% / 11.0% / 10.7%
Segment details as per the Zacks Digest model are as follows:
American Airlines - 3Q09 segment revenue was $3,882.0 million, down 21.5% y/y but up5.6% q/q from $4,946.0 million in 3Q08 and $3,677.0 million in 2Q09.
Regional Affiliates - 3Q09 segment revenue was $523.0 million, down 21.7% y/y but up 1.9% q/q from $668.0 million in 3Q08 and $513.0 million in 2Q09.
The Company expects regional affiliate capacity to decline by more than 1.0% y/y in 4Q09 and expects 2009 regional affiliate capacity to decline by approximately 8.0% y/y.
Cargo - 3Q09 segment revenue was $136.0 million, down 40.9% y/y but up1.5% q/q from $230.0 million in 3Q08 and $134.0million in 2Q09. One firm (Jesup & Lamont) expects cargo volume to continue to decline as the Company continues to reduce capacity.
Other - 3Q09 segment revenue was $585.0 million, up 1.4% y/y and 3.5% q/q from $577.0million in 3Q08 and $565.0 million in 2Q09.
Provided below is the graphical representation reflecting segment revenues as compiled by Zacks Digest:
Note: Given current trends,the brokerage firms on an average expectthe Passenger Revenue- American Airlines to be the main contributor of revenue. They, however, expect that revenue from this segment will decline from 77.0% in FY08 to 76.0% in FY11 with a three-year (2008-2011) declining CAGR of 1.7%. Passenger Revenue - Regional Affiliates and Cargo are expected to decline at three-year CAGRs of 2.9% and 9.9%, respectively. Other is expected to increase at a three-year CAGR of 3.8%.
Revenues in 4Q09 are being affected by a continued decline in businesstraffic, and although bookings are being made closer to travel date, advance bookedload factor for 4Q09 is up versus 4Q08. The increase in loadfactor is being driven by higher holiday traffic.Airlines have been able to stimulate leisure demand,but business travel cannot be stimulated through low fares.The result is the revenue decline. Until the Company can repair hurdle around business traffic, and until business traffic shows moreimprovement,one firm(Jesup & Lamont) does not expect any improvement in revenues.
The firms believe that there are some significant headwinds in 2010, including higher average fuel prices, lower ticket prices and continued relative weakness in business traffic. Business travelers are flying, but they are just paying leisure rates. The Company has allowed many restrictions on low fares to lapse. Hence, the result has been business travelers flying at lower yields, and this has kept pressure on revenues.
The Company plans to remain disciplined on capacity and focuses on its strengths inChicago, Miami, Dallas, New York, and Los Angeles. Non-hub flying is being pulled down.
Please refer to the Zacks Research Digest spreadsheet on AMR for specific revenue estimates.
Margins[Note: Only highlighted material has been changed.]
According to the Zacks Digest model, 3Q09 operating pro forma losswas $100.0 million versus operating losses of $189.0 million in 3Q08 and $191.3 million in 2Q09.
According to the Zacks Digest model, 3Q09fuel expenses were $1,453.0 million, down 46.6% y/y but up 8.9% q/q from $2,722.0 million in 3Q08 and $1,334.0 million in 2Q09. Operating expenses were $5,320.0 million, down 19.6% y/y but up 4.8% q/q from $6,613.4 million in 3Q08 and $5,076.3 million in 2Q09.The decrease is largely due to decreased fuel prices in 3Q09 versus 3Q08 somewhat offset by increased defined benefit pension expenses and retiree medical and other expenses (due to the stock market decline in 2008), and by cost pressures associated with the Company’s previously announced capacity reductions and dependability initiatives.
American's mainline cost per available seat mile(CASM)(unit cost) in 3Q09 was down 13.5% y/y due to lower fuel prices. Taking into account the impact of fuel hedging, the company paid $2.07 per gallon for jet fuel in 3Q09 versus $3.57 a gallon 3Q08.Excluding fuel, mainline unit costs in 3Q09 increased by 7.2% y/y, driven by reduced capacity, higher pension expenses, higher materials and repairs expenses, and investments in dependability initiatives.
American's mainline load factor, or the percentage of total seats filled, was 83.9% during 3Q09 versus 82.2% in 3Q08. 3Q09 yield, which represents average fares paid, decreased 16.3% y/y. The decrease in yield was largely due to more aggressive pricing industry-wide and reduced traffic in the premium cabins.
Provided below is a summary of margins as compiled by Zacks Digest:
Margin / 3Q08A / 2008A / 2Q09A / 3Q09A / 4Q09E / 2009E / 2010E / 2011EEBITDA Margin / 1.4% / 0.6% / 1.1% / 1.5% / 2.5% / 1.7%↑ / 9.8%↑
Operating Margin / -2.9% / -2.7% / -3.9% / -2.0% / -5.1% / -3.9%↓ / 1.6%↓ / 1.4%↓
Pre-Tax Margin / -5.7% / -5.0% / -6.5% / -5.2% / -10.9% / -7.5%↓ / -5.0%↓ / -1.9%↓
Net Income Margin / -5.6% / -5.0% / -6.5% / -5.2% / -10.9% / -7.5%↓ / -5.0%↓ / -1.9%↓
Note: Blank cells indicate that brokers have not provided figures.
Excluding special items, the Company expects mainline unit costs to be down 0.8% y/yfor 4Q09 while 4Q09 consolidated unit costs are expected to decrease 1.0% y/y. It expects mainline unit costs excluding fuel and excluding special items to increase 8.3% y/y in 4Q09 while consolidated unit costs excluding fuel and excluding special items are expected to increase 7.3% y/y from 4Q08.
Excluding special items, the Company expects mainline unit costs in FY09 to decline 8.8% y/y, while consolidated unit costs to decrease 9.1% y/yin FY09. Mainline unit costs in FY09 excluding fuel and excluding special items are expected to increase 6.9% y/y, while consolidated unit costs in FY09 excluding fuel and excluding special items are expected to increase 5.6% y/y.