Yahoo Finance American Airlines Increases Its Investor Returns
American Airlines' 1Q15: A Mixed Bag (Part 3 of 5)
Valuation
Riding on strong performance in the last 12 months, the stock price of American Airlines (AAL) has seen ~28%–30% returns in the last six months, as well as a ~40% rise in the last 12 months. However, AAL’s EV/EBITDA (or enterprise value to earnings before interest, tax, depreciation, and amortization), a valuation multiple, has decreased by 30% since 1Q15.
In the same period, EV/EBITDA for its peers Delta Air Lines (DAL) and Southwest Airlines (LUV) increased by 33% and 14%, respectively, while that of United Airlines (UAL) decreased by 4%. This is despite a 100% increase in EBITDA for American Airlines in 1Q15 as compared with 1Q14, which is higher than United Airlines’ 81%, Southwest Airlines’ 63%, and Delta Air Lines’ -13% in the same period.
Upgauging to improve profitability
Like many other air carriers, American Airlines (AAL) is introducing aircraft with more seats in order to average the cost of flying over a higher number of seats in its domestic markets.
Although it has strained its revenue per available seat mile (or RASM), upgauging has ultimately resulted in higher profitability, as can be seen from the results of other airlines as well. This strategy is also useful in dealing with competition from ultra-low-cost carriers.
Share buybacks to continue
American Airlines completed ~$190 million in share buybacks in the first quarter of 2015, and the company expects to perform very well going forward. It expects to continue its share buyback program, totaling about $2 billion over the next two years.
Improving return ratios
American Airlines’ return on capital increased from -4.62% in 1Q14 to 19.55% in 1Q15, while return on invested capital increased from 15.57% in 1Q14 to 20.67% in 1Q15. The company was able to record an ROE (or return on equity) of ~155%, offering considerable value to its shareholders.
You can invest directly in American Airlines’ shares or through ETFs such as the iShares Transportation Average ETF (IYT), which holds ~38% in airline stocks.
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