Transportation

Is Discounting Good for American Airlines?

American Airlines Group Inc. (NASDAQ: AAL) is making a risky move to compete with low-cost air carriers. The market reaction had shares up 1% on Monday to $46.15, but Credit Suisse only maintained a Neutral rating despite raising its price target to $52 from $48 in the call.

The take of Credit Suisse is that American Airlines knows what it is doing in this move. The firm even raised estimates despite the Neutral rating. Still, while it sees an untaxed earnings of more than $9 per share in 2015, the firm’s estimates are $5.50 (up from $4.80) in earnings per share in 2016 and $5.36 (from $4.95) in earnings per share in 2017.

Management addressed a fare-matching strategy, with most of the questions and answers being about it competing so aggressively with the ultra-low-cost carriers. Credit Suisse said that it wasn’t necessarily anything different from what has previously been said. Still, this was its most robust response with statistics.

One issue is that American is said to be quite profitable in the markets where it is matching low-cost carriers. Management also sees its strategy as working really well, suggesting there wouldn’t be a meaningful change
in number of seats offered at lower fares, even as American implements its version of cabin segmentation sometime in 2016.

Credit Suisse further sees comparable revenue growth to show slight improvement. That also will offset fuel and currency surcharge headwinds. Management’s view is things might not be getting worse, but they are not getting better yet.

Price-matching comes with a risk. You can pick up market share, but that share can come with lower margins — and that means lower profits, if you are profitable.

With American Airlines shares trading up 1.1% at $46.20 on Monday, its consensus price target is $53.38 and its 52-week range is $34.10 to $56.20.

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