American Airlines (NASDAQ: AAL) is poised for growth due to its large, established market position and planned $5 billion annual capital expenditures to modernize its fleet. This will give it younger, more fuel efficient aircraft sooner than competitors and expand capacity. The merger is creating synergies that will improve margins. However, AAL faces risks from its debt load and negative cash flows from fleet investment. Volatility in oil prices also impacts margins. The analysis provides a target price of $48.22 based on comparable company and discounted cash flow valuations.

1. AMERICAN AIRLINES
Arvind Viswanathan, Nakul Karnik & Daniel Dorchuck
1

2. Table of Contents
I. Investment Thesis
I. Industry Outlook
II. Company Profile
I. Financials & Valuation
2

3. INVESTMENT THESIS
3

4. Catalysts for Growth
 Large, established position in a highly
concentrated market
 Merger is creating cost and network synergies
to be realized in the medium and long term
 Plans to allocate $5b per year on capital
expenditure to modernize its fleet sooner than
competitors
 Substantial improvements in operating margins
has Implications for revenue stability
 Sizeable increase (42%) in ASM in 2014 will
expand market share
Risks
 Large debt burden and negative free cash flows
from fleet modernization could restrict current
growth prospects
 Public concern from the recent Ebola outbreak
may affect air transport demand
 Volatility in crude oil prices will significantly
impact margins
 Integration costs could exceed expectations
American Airlines (NASDAQ: AAL)
Current Price: $34.09 Target Price: $48.22 (annual 42.05% upside) Recommendation: Buy
American Airlines Group is a will solidify itself as the leader of its industry because of
its improved margins, investment in new aircraft, and its strong position in fast-
growing markets.
4

5. INDUSTRY OUTLOOK
5

6. Airline Demand Outlook
Worldwide GDP has shown consistent growth and
is projected to continue growing
 GDP growth is directly linked to disposable
income and consumer spending
Scheduled air traffic is strongly tied to economic
output
 Passenger traffic growth has historically
exceeded GDP growth
 Airline demand and traffic have doubled every
15 years and are expected to double by 2028
Emerging markets are leading GDP growth and air
traffic growth
 Emerging markets are projected to outpace
developed economies in economic growth
 These markets are driving air traffic growth
since air traffic is linked to regional economic
growth
 The middle class in expanding regions is
projected to increase from 1.413 billion to
2.782 billion by 2023
GDP Growth
Revenue Passenger Miles (RPM) Growth
6

7. Real crude oil prices are expected to decline over
the next 10 years
 Jet fuel is the largest cost for airline companies
accounting for up to 40% of operating costs
 Crack spread has narrowed further decreasing
fuel costs
 Industry margins will widen as input prices
decrease
 Firms are decreasing fuel hedging exposures in
reaction to decreasing prices and volatility,
further lowering costs
5-Year Historical Return on Airlines
Crude Oil Prices
Airline equities have historically outperformed
the market
 Airline stocks have provided a premium of
approximately 100% over the S&P 500 for a 5-
year period
 Investor confidence in the airline industry has
been steadily improving
 Airline companies have increasingly begun to
pay dividends to reward shareholders
7

8. COMPANY PROFILE
8

9. Competitive Advantages
 Industry leader in in both revenue passenger
miles and cost per available seat: highest capacity
and lowest cost per seat
 Superior presence in high-growth cities and
regions: largest share of Latin American market
for US airlines plus large presence in London,
Dallas, & Washington D.C.
 Most liquid airline in 1Q2014 (cash over last
year’s revenue)
 AA’s frequent flier program is the largest of any
competitor and was named the most generous
Effective Strategies
 Through its capital deployment program, AAL has
prepaid debt & leases, funded employee
benefits, bought back shares, and returned a
quarterly dividend.
 Capital expenditure will give AAL the youngest,
most fuel efficient fleet in North America in
roughly 5 years time
 International expansion through OneWorld
Alliance
 New routes (direct DFW to Beijing & Seattle to
Haneda) will tap the Asian markets
9

10. RISKS AND MITIGATION
10

11. Risks
 AAL is projected to produce negative cash flows
in 2014 due to heavy capital expenditure
 AAL is highly levered and has taken on
significant increases in debt since the merger in
2013
 Integration has gone smoothly so far, but the
company could encounter hurdles while
finalizing the integration.
 The Ebola outbreak could discourage air
transportation and has shaken investor
confidence.
 The unpredictable nature of oil prices could eat
into margins
Mitigation
 Projections indicate only one year of negative
cash flow for the company.
 AAL has prepaid some of its interest and lease
expenses for the year using its record breaking
revenue from 2Q2014.
 AAL’s transition has proved itself successful
immediately with record profits and
improvements in operating margins in the first
year. If these margins and revenues continue,
the integration will proceed seamlessly.
 The market’s response to Ebola has been called
a “gross overreaction”. Additionally, CDC is now
screening flights to the US from West Africa.
 With newer, more fuel efficient aircrafts and
domestic oil production, American Airlines will
see its risk to increasing oil prices diminish over
the long term. Moreover, if analyst shift their
predictions to price increases , AAL can employ
a futures hedge.
11

12. VALUATION
12

13. American Airlines
Comparable Analysis
as of 10/05/2014
Enterprise value as a multiple of
Company
Share
Price
Market
Value
Enterprise
Value Revenue (x)
EBITDA (x)
Price /
Earnings (x)
PEG (x)
RPM
Ticker (US$)
(US$mm
) (US$mm) LTM CY2014E LTM
CY2014
E
CY2015
E
CY2014
E
CY2015
E
CY2014
E CY2013
DELTA AIRLINES DAL 36.11 30,441 36,682 0.94 0.85 5.61 5.31 4.66 11.35 9.31 0.97 0.00019
SOUTHWEST
AIRLINES LUV 33.04 22,637 21,401 1.18 1.15 8.05 7.00 6.21 18.12 15.23 1.00 0.00021
JETBLUE AIRWAYS
CORP JBLU 10.85 3,167 4,756 0.84 0.81 6.18 5.72 4.78 15.30 11.82 1.18 0.00013
UNITED CONTINENTAL
HOLDINGS UAL 46.94 17,536 24,060 0.62 0.62 6.72 5.81 4.78 10.19 7.87 0.47 0.00012
ALASKA AIR GROUP
INC ALK 43.49 5,866 5,215 0.93 0.97 4.07 4.53 4.23 11.38 10.46 0.68 0.00018
Mean 0.90 0.88 6.13 5.67 4.93 13.27 10.94 0.86 0.00017
Median 0.93 0.85 6.18 5.72 4.78 11.38 10.46 0.97 0.00018
High 1.18 1.15 8.05 7.00 6.21 18.12 15.23 1.18 0.00021
Low 0.62 0.62 4.07 4.53 4.23 10.19 7.87 0.47 0.00018
<----------------P/E Multiples ------------------>
10.38 10.88 11.38 11.88 12.38
2014E EPS
Implied
MCAP: 40,288.30 42,228.97 44,169.64 46,110.31 48,050.98
5.39
Implied
Price: 55.95 58.64 61.34 64.03 66.73
<--------------EBITDA Multiples --------------->
4.72 5.22 5.72 6.22 6.72
Implied
EV: 28,627.27 31,659.82 34,692.37 37,724.92 40,757.47
2014E
EBITDA
Implied
MCAP: 20,947.27 23,979.82 27,012.37 30,044.92 33,077.47
6,065.10
Implied
Price: 29.09 33.30 37.51 41.72 45.93
<-----------------Revenue Multiples ------------------>
0.75 0.80 0.85 0.90 0.95
Implied
EV : 32,384.60 34,533.28 36,681.95 38,830.63 40,979.30
2014E Revenue
Implied
MCAP: 24,704.60 26,853.28 29,001.95 31,150.63 33,299.30
42,973.50
Implied
Price: 34.31 37.29 40.27 43.26 46.24
<-----------------RPM Multiples ------------------>
0.00014 0.00016 0.00018 0.00020 0.00022
Implied
EV : 31,814.23 36,331.03 40,847.84 45,364.64 49,881.44
2014E RPM
Implied
MCAP: 24,134.23 28,651.03 33,167.84 37,684.64 42,201.44
225,840,200.0
Implied
Price: 33.52 39.79 46.06 52.33 58.60
13

14. Valuation Conclusions
14

15. APPENDIX
15

16. Discounted Cash Flow
2014 2015 2016 2017 2018 2019 2020 2021
Sales (Revenue) 42973.50 46411.38 50124.29 53632.99 57387.30 60256.67 63269.50 66432.97
EBITDA Margin 14.10% 16.30% 17.40% 17.40% 17.40% 17.40% 17.40% 17.40%
EBITDA 6059.26 7565.05 8721.63 9332.14 9985.39 10484.66 11008.89 11559.34
Depreciation & Amortization -1152.00 -1152.00 -1152.00 -1152.00 -1152.00 -1152.00 -1152.00 -1152.00
EBIT 4907.26 6413.05 7569.63 8180.14 8833.39 9332.66 9856.89 10407.34
Interest -867.00 -867.00 -867.00 -867.00 -867.00 -867.00 -867.00 -867.00
Taxes (35.00%) -1226.82 -1603.26 -1892.41 -2045.04 -2208.35 -2333.16 -2464.22 -2601.83
Remaining Tax Loss Benefit 4300.00 3073.18 1469.92 0.00 0.00 0.00 0.00 0.00
Tax Benefit from Loss Carryforward 1226.82 1603.26 1469.92 0.00 0.00 0.00 0.00 0.00
Net Income 4040.26 5546.05 6280.14 5268.11 5758.04 6132.49 6525.67 6938.50
Depreciation Addback 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00
Capital Expenditures -5549.00 -5150.00 -5000.00 -5000.00 -5000.00 -1800.00 -1800.00 -1800.00
Change in Working Capital 138.00 149.04 160.96 173.84 187.75 202.77 218.99 236.51
Unlevered Cash Flows -494.74 1399.01 2271.18 1246.27 1722.30 5281.73 5658.68 6054.00
PV of Cash Flows -494.74 1247.56 1806.05 883.75 1089.09 2978.33 2845.46 2714.68
Assumptions
Sales Growth (Period 0-2, 3-5, 6-8) 8% 7.00% 5.00%
Tax Rate 25%
Depreciation 1152
Discount Rate (WACC) 12.14%
Tax Loss Benefit 4300.00
Shares Outstanding 7.20
16