American Airlines Group Inc. will likely have a far smaller fuel bill than rivals Delta Air Lines Inc. and United Continental Holdings Inc. in 2015. That’s because the airline doesn't use costly hedges to cushion its fuel costs, which are now considerably lower following the recent slide in crude-oil prices.
American will pay about 30 cents a gallon less than Delta and United equal to savings of at least $1.3 billion, according to Wolfe Research. At the same time, the carrier has overhauled its pay structure without including a profit-sharing program, saving it another $1.2 billion over other legacy airlines, according to Wolfe’s calculations.
“We don’t expect cheaper fuel to translate dollar-for-dollar to the stock price (e.g., EPS will go up but the P/E multiple will likely continue to compress), but both of these benefits will probably be net tailwinds for the stock relative to AAL’s purest peers,” Wolfe analysts wrote in a weekly note on the sector.
American Airlines’ share price isn't reflecting this benefit, mostly because of concerns about integration risk, following the company’s merger with US Airways as part of its recent emergence from bankruptcy. The stock has also been pummeled by factors such as its exposure to the troubled Central and Latin American region.
But even in a worst-case scenario, according to Wolfe, it is difficult to see how those headwinds could overtake the tailwinds of its not hedging on fuel and not paying into a profit-sharing program, if the rest of the airline’s business is held constant.
Seeking Alpha agreed that the stock should benefit from the lack of fuel hedging, which will allow American to fully realize lower fuel costs.
The stock is trading at a huge forward-valuation discount to the overall market, with a forward price/earnings ratio of 6, well below the overall market’s P/E ratio of 17 and the average P/E ratio for its big competitors of 10, the research company wrote in a report published Friday.