Shares of American Airlines Group (AAL, Financial) has appreciated firmly this year, increasing 40% as such. Given the organization's solid money related performance as of late, this barely comes as a shock. The organization has profited because of solid avionics request in the U.S., while a drop in oil prices has lead to a decrease in fuel costs. Actually, American Airlines just reported a record first quarter a week ago.
For the reported quarter, American Airlines profited from the lofty drop in oil prices and reported net benefit of $1.2 billion, or $1.73 per weakened share on revenues of $9.8 billion. The principle explanation behind the gigantic benefit was because of a 7.1% abatement altogether operating costs to $8.6 billion, basically because of an astounding 42.2% diminishing in the organization's fuel costs.
The organization will keep on profiting from the low oil prices as American is among one of the few avionics organizations that take after a "no hedging" policy as far as fuel expenses are concerned. This is the very reason behind why the organization has profited colossally from a drop in unrefined petroleum evaluating over the previous year.
Therefore, American hopes to pay a normal of $1.73-$1.78 per gallon for plane fuel this year, down from the former year's normal price of $2.91. This will sum to $5 billion of fuel cost savings this year, and thusly power its earnings growth. The drop in oil prices hasn’t been priced into the company’s shares yet and as a result, the management has continued to buy back shares at cheap valuations. The company repurchased $190 million worth of common stock, or 3.8 million shares, at an average price of $49.47.
The company ended the quarter with $9.9 billion in cash and short-term investments (compared to just over $8 billion at the end of 2014. The company also returned $70 million to shareholders via a quarterly dividend. With close to $10 billion in cash, investors should expect more buybacks and a higher dividend in the near future.
Rise in Demand
The Federal Aviation Administration (FAA) forecasts that aviation demand will grow at a steady pace in the long run. According to the FAA's 2014-2034 forecast study:
"The 2014 FAA forecast calls for U.S. carrier passenger growth over the next 20 years to average 2.2 percent per year. Commercial air carrier domestic revenue passenger miles (RPMs) are forecast to increase 0.9 percent in 2014, and then grow at an average of 2.2 percent per year through 2034."
To meet this expected increase in demand, American Airlines is improving its infrastructure. For example, the company is already undertaking a fleet modernization program, under which it added 132 new aircraft to its fleet last year and retired 111 older ones. This year, it plans to take delivery of 128 new airplanes and retire 126 older ones.
Conclusion
Therefore, American appears to be set to advantage from the shortcoming in crude oil prices going ahead. This, alongside the increase in air ticket demands, will drive its share price going ahead. In fact, analysts anticipate that American's primary concern will develop at a yearly compound rate of very nearly 23% throughout the following half decade, which is more than the 17% business normal. Considering that the stock trades at under 13 times last year’s earnings, lower than the industry average of 58, it looks cheap at the current levels.
Subsequently, despite the fact that American has risen firmly this year, it still has room for further growth.
