AAL’s Ambitious Change: What Investors Need to Know

With rapid technological advancements and travelers' evolving demands, the aviation sector is experiencing unprecedented growth and expansion. American Airlines Group, Inc. (AAL), a frontrunner, has unveiled plans to expand its fleet, underscoring its dedication to staying ahead in this dynamic landscape.

Comprehensive Fleet Expansion Breakdown

AAL, earlier this month, announced orders for about 260 new aircraft, including 85 Airbus A321neo, 85 Boeing 737 MAX 10 and 90 Embraer E175. Also, the orders encompass options and purchase rights for an additional 193 aircraft. Under the Boeing order, American Airlines has chosen to convert 30 of its existing 737 MAX 8 orders into 737 MAX 10 aircraft.

These orders from Airbus SE (EADSY), Boeing Company (BA), and Embraer S.A. (ERJ) form a vital component of American Airlines’ ongoing commitment to enhance premium seating options across its narrowbody and regional fleets. They also serve to bolster the airline’s domestic and short-haul international network, contributing to its long-term sustainability and competitiveness.

“Over the past decade, we have invested heavily to modernize and simplify our fleet, which is the largest and youngest among U.S. network carriers,” stated American Airlines’ CEO Robert Isom. “These orders will continue to fuel our fleet with newer, more efficient aircraft so we can continue to deliver the best network and record-setting operational reliability for our customers.”

Since 2014, AAL has received more than 60 mainline and regional aircraft. With the recent announcement, American Airlines now has around 440 aircraft on order, ensuring its aircraft order book extends into the next decade.

“As we look into the next decade, American will have a steady stream of new aircraft alongside a balanced level of capital investment, which will allow us to expand our network and deliver for our shareholders,” said American’s Chief Financial Officer Devon May.

Boosting Regional Fleet Capacity

AAL is prioritizing the integration of larger, dual-class regional aircraft into its fleet, a move aimed at enhancing connectivity from smaller markets to the airline’s global network. The airline has set a goal to retire all its 50-seat single-class regional jets by the decade’s end while ensuring continued service to small and medium-sized markets with larger regional jets.

Upon the completion of deliveries of Embraer E175 aircraft, American Airlines foresees its entire regional fleet being comprised of dual-class regional jets featuring premium seating, high-speed satellite Wi-Fi, and in-seat power amenities. American’s wholly-owned regional carriers will operate the new E175 aircraft, further solidifying the airline’s commitment to modernizing its regional operations.

Arjan Meijer, CEO of Embraer Commercial Aviation, said, “The E175 is truly the backbone of the U.S. aviation network, connecting all corners of the country.”

“One of the world’s most successful aircraft programs, the E175 was upgraded with a series of modifications that improved fuel burn by 6.5%. This modern, comfortable, reliable and efficient aircraft continues to deliver the connectivity the U.S. depends on day after day. This represents American’s largest-ever single order of E175s, and we thank American for its continued trust in our products and people,” Meijer added.

Improvements to Existing Aircraft for a Premium Travel Experience

In addition to the new fleet, AAL has announced plans to initiate retrofitting of its A319 and A320 aircraft, commencing in 2025, in response to heightened customer demand for premium travel experiences. The retrofit program aims to revamp the interiors, featuring power outlets at each seat, expanded overhead bins, and refreshed seats with updated trim and finishes.

Under this initiative, American’s A319 fleet will undergo modifications to accommodate additional premium seating, raising the count to 12 domestic first-class seats. Similarly, the A320 fleet retrofits will see an increase in domestic first-class seating to 16.

Through the combination of retrofitting existing aircraft and the anticipated arrival of new aircraft, American Airlines projects a growth of over 20% in premium seating across its fleet by 2026.

Strategy for Long-Term Growth and Value Creation

On March 4, 2024, AAL’s CEO Robert Isom and other senior leaders provided an update at 2024 Investor Day in New York on the airline’s performance and its path forward for long-term growth and value creation.

“I’m incredibly proud of the work we have done over the past two years to build an American that is stronger, more focused and well-positioned to realize our full potential,” said Robert Isom. “Today, with our key initiatives in place, American is positioned to deliver a reliable operation for customers while generating durable earnings over the long term. We’re excited for the path ahead and confident in our ability to drive value for our shareholders through our commercial initiatives and continued execution.”

Also, American Airlines provided insights into the financial targets it had set for 2024 through 2026 and beyond. For 2024, the airline expects adjusted EBITDAR margin growth of nearly 14% year over year, free cash flow of about $2 billion, and total debt of $41 billion.

American Airlines targets adjusted EBITDAR growth of approximately 14%-16% for the year 2025, free cash flow of greater than $2 billion, and total debt of nearly $39 billion. For 2026 and beyond, the airline projects adjusted EBITDAR growth of around 15%-18%, free cash flow of greater than $3 billion, and total debt of less than $35 billion.

AAL’s members of the senior leadership team also discussed the drivers of its value-creation opportunities, such as operating a transformed fleet that is simplified and optimized for efficiency, capitalizing on competitive advantages of its network poised to adapt to evolving consumer trends, attracting and retaining customers with travel rewards program AAdavantage®, and generating durable financial results.

Bottom Line

AAL’s recent orders for Airbus, Boeing, and Embraer aircraft will allow the airline to expand premium seats across its narrowbody and regional fleets and bolster its domestic and short-haul international network for sustained long-term growth. Further, American is expected to retrofit its A319 and A320 fleets starting in 2025, increasing the number of domestic first-class seats on each aircraft.

These strategic investments in fleet modernization, operational efficiency, and customer experience enhancement demonstrate American Airlines’ commitment to meeting evolving industry demands. This, in turn, could lead to enhanced revenue streams and passenger satisfaction, contributing positively to the company’s growth trajectory.

By upgrading its fleet, AAL can further enhance its competitive position in the market, especially by offering a superior travel experience compared to its rivals. This could help the airline capture a larger market share and strengthen its position as a leading player in the aviation industry.