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Can American Airlines’ Margin Expand in 2016?

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Oct. 11 2016, Updated 10:06 a.m. ET

American Airlines’ margin

In 1Q16, American Airlines’ (AAL) EBITDA fell 9% to $1.7 billion with an EBITDA margin of 17.9% as compared to 18.9% margins in 1Q15. For 2Q16, EBITDA fell 0.68% with an EBITDA margin of 21%.

Third quarter EBITDA is expected to fall 22% to $2.0 billion with an EBITDA margin of 18.7% and again fall 6.7% in 4Q16 with a margin of 14%.

For the full year 2016, American Airlines’ EBITDA is expected to fall 4.3% as against the earlier expectation of a 0.5% decline with an EBITDA margin of 18.2%. For 2017, analysts are estimating EBITDA to fall 11.5% and EBITDA margins to narrow 15.8%.

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Fuel cost benefit is limited

American Airlines is the only airline to have taken full benefit of the fuel price decline thanks to its no hedging policy. AAL’s fuel costs have fallen from $2.91 per gallon in 2014 to $1.72 per gallon in 2015. This is the lowest among peers Delta (DAL), Alaska (ALK), and United (UAL).

For 2016, American Airlines expects fuel costs to fall down further to $1.30 to $1.35 per gallon in 2Q16 and then inch up to $1.36 to $1.41 in 3Q16 and $1.40 to $1.45 in 4Q16, resulting in fuel cost savings of $1.6 billion. The recent oil price rise may put a slight dent on these expectations. This is the only factor contributing to AAL’s margin expansion in 2016.

AAL expects cost per available seat mile (or CASM) ex-fuel (operating expenses excluding fuel) for 2016 to increase by 3%–5%, excluding effects of labor contracts.

Load factor decline

American Airlines’ utilization has improved continuously since June 2015. However, since February 2016, the trend has reversed and utilization has been falling. This is the result of high capacity growth in the first quarter.

Investors should thus closely watch the airline’s utilization in 2016 and analyst estimates for margins. American Airlines (AAL) forms 1.5% of the Guggenheim S&P 500 Equal Weight Industrials ETF (RGI).

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