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Stock Analyst Update

We Stand Pat on American After Revised Guidance

We're not changing our fair value estimate after management rolled back capacity expansion for the coming quarter and raised projections for other revenue.

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 American (AAL) shares traded off after the carrier issued revised guidance for its third quarter. We don’t expect to update our $44 fair value estimate, and with our very high uncertainty rating, shares remain fairly valued. Management rolled back capacity expansion for the coming quarter, lowering available seat miles from 75.5 billion to 75 billion, still higher than the year-ago period by nearly 3%. American also raised projections for other revenue, which includes loyalty program revenue and contracted services, to $740 million from $690 million. Under the carrier’s revised guidance, higher total revenue per available seat mile, or TRASM, has a higher mid-point at 2.5%, instead of the previous guidance of 2%, thanks to higher domestic yields in the quarter. After accounting for these changes, we see no reason to update our full-year TRASM forecast as American’s revised guidance still places our 2018 TRASM projection of 15.71 cents within reach.

Countering American’s higher revenue expectations during the quarter are higher average fuel prices. Fuel prices will now fall between $2.28 to $2.33, instead of $2.22 to $2.27, raising American’s fuel expense in our model by $50 million to $100 million. Separately, management maintained projections for costs per available seat mile excluding fuel and special items, showing flat to little growth over the prior-year third quarter. We don’t believe our full-year pretax margin is in jeopardy at over 6%.

To buttress cash flows in the high oil price environment, American will continue trimming capital spend among other measures. Non-aircraft capital expenditures and gross aircraft capital expenditures will finish lower than in third-quarter guidance. American now expects non-aircraft capital expenditures of $470 million (was roughly $500 million) and gross aircraft capital expenditures of $551 million (was $566 million).

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Danny Goode does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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