American Airlines Stock Presentation

OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE 1

Stock Analysis: American Airlines GroupGroup 4: Brian Jones, Ben Drabinski, Jimmy Yu, Trent Bruchhaus, Spencer Wharton, Kara Stessl


Introduction

Quality

Growth

Momentum

Valuation

Target Price

Today’s Agenda

3OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE

History of American Airlines GroupThe American Airlines Group was formed in December 2013 through the merger of American Airlines and US Airways. While AMR stakeholders took 72% ownership of the company, US Airways retained the majority of operational management positions, including appointing Doug Parker as the new CEO.

Improving FinancialsImproving margins and efficiency

AA and US Airways MergerDivisions include: American Airlines,

Envoy Air, US Airways, Piedmont

Airlines, PSA Airlines, American Eagle,

US Airways Express.

World’s Largest AirlineGenerates over $40 billion in revenue,

flies over 193 million passengers, and

has a flight size of 962 aircrafts.

Stock Features

Ticker AAL

Exchange NASDAQ

Current Price $49.22

Market Cap 33.91 B

IWF Ranking 66

Shares Outstanding 696.65 M

52-Week Range $28.10- $56.20

Dividend Yield 0.82%

Sector Consumer Discretionary

Industry Airlines

OVERVIEW AND STOCK FEATURES

$49.22

American Airlines Group Competitors

Data from Bloomberg

OVERVIEW QUALITY GROWTH MOMENTUM VALUATION TARGET PRICE

AAL Stock Performance (since merger)

65% 35%

Revenue per Passenger Miles

Domestic International


Engage our team membersEnsure they have the tools and information they need to do the jobs they perform so well. Create an environment of well coordinated, collaborative teamwork and mutual respect.

Be an industry leaderSafe and reliable airline operations – It must be a part of the fiber of our company.

Focus on our customers’ needs and

wantsProvide a network and a product that is as good or

better than our competitors.

Look to the futureOur industry is evolving and

we need to ensure we are leading the change, not

chasing it.

Provide a return for our investorsAs the largest airline in the world, we should be the most profitable. If not, investments will go to other airlines than ours and that is not a formula for success.

Strategic Plan to “Restore American to the Greatest Airline in the World”



COMBINED FLIGHT PATHS

10 HUBSJFK, LGA, Chicago, Dallas, Miami, LAX, Charlotte, PHL, Phoenix, Washington DC

54 COUNTRIES

339 DESTINATIONSAVERAGING 6,700 FLIGHTS PER DAYOFFERS MOST DESTINATIONS OF ANY AIRLINE IN THE WORLD

WORLD’S LARGEST AIRLINE BY REVENUE, PASSENGERS FLOWN, AND KILOMETERS FLOWN/PASSENGER


Data from AAL Investor Relations


BUSINESS QUALITY

#4 #4 #5

#6 #5 #3

#3 #1 #1

Post-Merger Competitive Network


Data from AAL Investor Relations

Market Share % 19.9 18 16 12.6 33.5

AAL DAL UAL SWA Other


Competitive Advantage• International

Placement and

Route

Structure

• Economies of

Scale

• Brand Loyalty

Route Structure and International PlacementLargest airlines in the

world with more

routes and hubs than

any other. Can

capitalize on their

advantages in routing

and hubs. Further

expansion into Asia

and South America

will be key.

Economies of Scale

Capacity to scale

upwards unmatched

by any other airlines.

Operational

efficiencies a result of

the merger. In the

process of a major

airplane purchasing

program.

Brand Loyalty

Combining US Airways

Dividend Miles

program into

American Airlines

AAdvantage program

within the next 30

days. Greater sales

and brand loyalty

expected.


BUSINESS QUALITY


FIVE FORCES ANALYSIS


New

Entrants

• Low; Requires a large amount of capital to enter, existing players already have a cost advantage. Customers tend to use larger airlines with established brand identities.

Substitutes

• Medium; Substitutes within the airline industry; cars, buses, boats, and trains a threat for domestic travel.

Suppliers

• Low; Dominated by Boeing and Airbus; high switching costs; long-term contracts

Buyers

• Low; Consolidated industry can keep prices high; low switching costs

Rivalry

• High; few players competing on price and availability; mature stage of the business cycle


MANAGEMENT QUALITY AND CORPORATE GOVERNANCE


CEO: Doug Parker• Personal Strengths: financial analysis and financial management,

operational improvements, prior airline merger experience• Experience: Prior Chairman and CEO of US Airways; Prior Chairman

and CEO of American West, led the firm out of the 9/11 crisis

Board of Directors• Large Board: 11 members• 10 independent board members• More than half of the members are investors (Bank, PE, HF)


Union pay and constrictions negotiations have potential to be timely and costly..

Labor

Consolidated industry with few players.

Intense Industry Competition

Extremely high leverage has potential for significant losses.

Significant IndebtednessCondition of the economy and fuel

price could have a significant impact.

Potential for Significant Losses

Expected synergies of $1+ billion may not be fully realized.

Merger

Obtaining and paying for increased financing could be costly.

Financing

COMPANY & INDUSTRY RISKS



AIRPLANE INVENTORY AND EXPECTATIONS

2015 is proving to be an important year for American Airlines regarding its fleet purchases and lease expirations

Data from AAL 10-K



Note: Aircraft deliveries include order, option, option LoI, and LoI. Fleet turnover rates were estimated taking the current fleet count and dividing by the annual number of deliveries from 2014-2020.

AIRLINE INDUSTRY FLEET COMPARISON

Alaska Airli

nes

Allegiant A

ir

American-U

S Airways

Delta

Frontier Airli

nes

Hawaiian Airli

nes

JetBlue Airli

nes

Southwest Airli

nes

Spirit Airli

nes

Sun Country Airli

nes

United Airli

nes

Virgina Americ

a0

200

400

600

800

1000

1200

2013 Fleet Size 2014-2020 projected deliveries

American-U

S Airways

Delta

Frontier Airli

nes

Hawaiian Airli

nes

JetBlue Airli

nes

Southwest Airli

nes

Spirit Airli

nes

Sun Country Airli

nes

United Airli

nes

Virgina Americ

a0

2

4

6

8

10

12

14

16

18

Avg. fleet age (yrs), 2013 9 22 Avg. fleet age (yrs), 2020 (est.) 8 -

Data from Flightglobal Ascend Fleets database (August 2014)

Fleet Size Projections Average Fleet Age Projections



• The program started by retiring its fleet of MD-80 aircraft, with an average age of 22 years, with Boeing 737-800s

• Claims it will have the “industry’s youngest and most fuel-efficient fleet” within 5 years..

• Industry is being pushed by the government’s Environmentally Responsible Aviation project

Expected to cut its average fleet age from 13 years in 2013 to 7 years in 2020 (Industry average – 13 years in 2013 and 11 years in 2020 (est.)).

Began in 2009 in order to replace its

oldest airplanes with newer, more fuel

efficient, technologically

advanced aircraft.

AIRPLANE FLEET EXPECTATIONS


Data from AAL 10-K


SOFT TRAVEL DEMAND YTD…BUT HIGHER EFFICIENCY!

AAL posted a slight decline in airline traffic for FebruaryDrop of 0.7% in revenue

passenger miles (RPMs) to 14.97 billion from February 2014

However, the percentage of seats filled with passengers

increased to 79.3% from 78.4% in Feb. 2014

A sign of increased efficiency

0.9%

0.7%


Data from AAL 10-K


BankruptcyAmerican Airlines emerged from Chapter 11 bankruptcy just before the merger with US Airways in December 2013

PensionsPension benefits by Union members. Promised before bankruptcy proceedings – worth appx. $212 million

AntitrustAnti-trust action against the merger. No trial date currently set.

Sabre Lawsuit

LEGAL PROCEEDINGS

Sabre is charged with restricting American Airlines’ ability to our products to customers in order to protect their own market share.



R/ASM• Revenue per available

seat mile

• percentage of available seating capacity that is filled with passengers

• considered to be the most important airline metric

Load Factor

C/ASM• Cost per avaiilable seat

mile• Represents how much it costs to

fly one seat one mile

Yield• Revenue per passenger

mile (RPM)

AIRLINE OPERATING METRICS



201420132012201120102009200820072006200574

76

78

80

82

84

American Airlines (AAL) 201420132012201120102009200820072006200570

72

74

76

78

80

82

84

86

American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL)

JetBlue Airways (JBLU) Southwest Airlines (LUV)

201420132012201120102009200820072006200510

11

12

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18


JetBlue Airways (JBLU) Southwest Airlines (LUV)2014201320122011201020092008200720062005101112131415161718

American Airlines (AAL)

Load Factor (%)

Yield (cents)

Data from Factset

Load Factor (%)

Yield (cents)




20142013201220112010200920082007200620058

9

10

11

12

13

14

15

American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL)JetBlue Airways (JBLU) Southwest Airlines (LUV)

20142013201220112010200920082007200620058

9

10

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12

13

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15

American Airlines (AAL)

201420132012201120102009200820072006200510

15

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American Airlines (AAL)2014201320122011201020092008200720062005

0

5

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40



R/ASM (cents)

Data from Factset

C/ASM (cents)

R/ASM (cents)

C/ASM (cents)




PROFITABILITY QUALITY

Data from Factset



AAL UAL DAL JBLU LUV0

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American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL) JetBlue Airways (JBLU) Southwest Airlines (LUV)

Gross Margin (%) 26.7 14.0 16.6 13.3 24.5

Operating Margin (%) 11.8 7.5 7.7 9.4 12.6

Net Margin (%) 6.8 2.9 1.6 6.9 6.1

ROA (%) 6.7 3.0 1.2 5.3 5.8

ROE (%) - 42.0 6.4 17.2 16.1

Gross Margin (%) Operating Margin (%) Net Margin (%) ROA

Data from Factset

PROFITABILITY QUALITY



Data from Factset

LIQUIDITY AND CREDIT QUALITY



AAL UAL DAL JBLU LUV0.0

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Interest Coverage (EBIT) 5.3 4.0 5.0 3.7 18Total Debt/EBITDA 2.8 2.6 2.0 3.1 0.8Net Debt/EBITDA 1.6 1.7 1.1 2.3 -0.1LT Debt/EBITDA 2.5 2.3 1.8 2.8 0.7Total Debt/Total Capital 90.0 83.5 52.6 51.8 28.4Total Debt/Total Assets 41.6 32.4 18.1 34.7 13.3

Data from Factset

Interest Coverage (EBIT) Total Debt/EBITDA Total Debt/Total Capital Total Debt/Total Assets

DEBT COVERAGE



AMERICAN AIRLINES GROWTH

• Growing passenger revenue per available seat miles

• Improving Load factors to 82% by the end of 2014

• Declining Cost available seat driven by lower jet fuel cost

Towards ahead

AIRLINE INDUSTRY METRICS

HISTORICAL GROWTH

Data from Factset



Dec '05 Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14

-20.00

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HISTORICAL GROWTH

Data from Factset

Sales Growth (%) EBITDA Growth (%)

Net Income Free Cash Flow Growth (%)



Capacity constraint for full-services

airlines: strong pricing power

Grow capacity through capital expenditure at

2-3% vs GDP growth rate at

3.3%

Low fuel cost

Continued trend of high

domestic yieldU.S. economic

growth

GROWTH DRIVERS



AMERICAN AIRLINES CAPACITY

• Leading capacity growth: 2-3% capacity growth of AAL vs 1-2% capacity growth at DAL, UAL

• 6-7% capacity growth for lower cost airlines

• CapEx focuses on purchasing of short haul airlines to exploit domestic markets

World Airline Capacity & Passenger Traffic

Data from Factset

GROWING CAPACITY AND ACQUISITION STRATEGY

US Airline Capacity

• Competition in Asian and Trans-Pacific routes due to overcapacity lower yield



Data from Factset

PRICE MOMENTUM



PRICE MOMENTUM

Data from Factset



Strong rebound coming out of bankruptcy

Positive earnings drive stock price upwards

Data from Factset

EARNINGS MOMENTUM



Current Trading Price: $49.22 Upside Potential: 24.9%

DCF VALUATION


Data from Factset

Key Inputs

Projected out 3 years

Low WACC for Airlines (5.64%)

4% Short-Term Growth

3% Long-Term Growth

35% Tax Rate

11.86% EBIT Margin

Results (in millions)

Enterprise Value: $52,992

Debt Value: $18,229

Cash: $8,077

Equity Value: $42,840

Shares: 696.6

Share Price: $61.50



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11.21.41.61.8


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0.20.40.60.8

11.21.41.61.8

American Airlines (AAL) United Continental (UAL) Delta Air Lines (DAL) JetBlue Airways (JBLU)

Southwest Airlines (LUV)

P/E LTM 12.5 23.1 58.3 15.2 27.1P/E NTM 4.8 6.2 9.1 10.7 12.5PEG NTM 0.2 0.3 0.4 0.3 0.6P/Sales 0.8 0.7 0.9 1 1.6P/Bk 17 10.6 4.3 2.2 4.4P/CF 11.6 9.6 7.7 6.8 10.5EV/EBITDA 6.8 7.6 6.6 8.9 9.1EV/Sales 1 0.9 1.1 1.3 1.6Div Yld 0.8 0 0.8 0 0.5

P/E NTM Price/Sales EV/EBITDA EV/Sales

PEER MULTIPLES


Data from Factset


AAL Multiple Competitors Median Valuation Upside Potential

P/E (LTM) 12.5 19.15 $75.41 53.21%

P/E (NTM) 4.8 9.9 $101.52 106.26%

P/Sales 0.8 0.95 $58.45 18.75%

EV/EBITDA 6.8 8.25 $62.83 27.65%

EV/Sales 1.0 1.2 $58.90 19.67%

TARGET PRICE RANGE

$65-$75 32.1% - 52.38%

RELATIVE VALUATION

UPSIDE POTENTIAL


Data from Factset


Current Price: $49.2214 Buys 2 HoldsUpside Potential: 32.1%

Target Price: $65Annual Dividend: $0.40Street Target Price: $69.53

Data from AAL Investor Relations and Factset

CONCLUSION



QUESTIONS?

Economy & Finance

American Airlines Stock Presentation