This Analyst Is Positive On American Airlines, Despite Investors Bearish Take

Shares of American Airlines Group Inc (NASDAQ: AAL) were deep in the red after investors overlooked the fourth quarter beat and were rather concerned on airline’s higher unit costs in 2017 and reduced returns.

According to a note from Deutsche Bank, American Airlines produced its second-best-ever pretax profit and margin (ex-items) in history in 2016, reporting $5.1 billion and 12.6 percent, respectively (second only to 2015). The company's shareholders were rewarded with $4.6 billion of share repurchases and dividends.

Shares fell more than 6 percent as bears engulfed the stock, concerned about the level of future shareholder returns and margin performance due to expected higher unit costs.

That said, analyst Michael Linenberg maintained his Buy rating and $55 price target as he believes the situation will improve post the completion of integration of US Airways. He also expects improving RASM trends to continue, leading to better-quality earnings in 2017. Linenberg expects March quarter RASM increase of 4.2 percent.

“While we expect non-fuel unit cost inflation (in addition to rising fuel prices) to pressure margins in 2017, the wind-down of the company’s integration should drive cost efficiencies in 2018,” Linenberg wrote in a note.

The analyst noted that the company guided to a March quarter RASM increase of 2.5 percent to 4.5 percent year over-year, an improvement from the December quarter’s 1.3 percent increase. American expects to see year-over-year RASM increases in each quarter of 2017.

Earlier, American Airlines raised its minimum liquidity target by $500 million to $7 billion, mainly driven by pension obligations. As such, the company said it will have less excess liquidity going forward than it has had since the merger. This in turn will potentially reduce the size of shareholder returns.

In fact, share repurchases have been trending down at $616 million, and $554 million of shares repurchased in September and December quarters of 2016, respectively.

The airline also expects unit costs, ex-fuel, to rise 4 percent in 2017 due to headwinds from labor costs, maintenance, and depreciation tied to its ongoing fleet renewal program.

At last check, shares of American fell 5.64 percent to $44.30.