Have Airline Analysts Lost their Focus?

American Airlines put out its earnings numbers today, joining the ret of the US industry with record profits. In a week filled with superlatives the carrier is laying claim to “biggest profit ever” for an airline, a move which rankled some and which probably means very little, other than to try to distract the analysts from some of the turbulence the carrier still faces. Fare pressure is hitting its Dallas hub in a big way thanks to a significant increase in capacity (mostly Spirit, but Southwest and Virgin America across town are impacting things, too) and the carrier continues to see significant exposure in the Latin American markets.

Much like yesterday’s call with JetBlue there were choice words from management for analysts in today’s discussion. In between talk of the new “basic economy” fares (which are not to be confused with the “Advantage” fares, despite many analysts doing so) and debating a journalist’s claim that Delta claims its profit was better ignoring profit sharing and various other bits was the statement from CEO Doug Parker that he was not going to aggressively pursue and “investment grade” rating. To do so would require reducing debt even further, something which Parker admits is possible but which he also believes is bad business.

Driving to "investment grade" rating means passing on 4% loans for aircraft. @AmericanAir's Parker says that's bad business. #AvGeek

— Seth Miller (@WandrMe) January 29, 2016

We're borrowing at well below "investment grade" rates so I'm not sure what the benefit is. –@AmericanAir's Parker #AvGeek #PaxEx

— Seth Miller (@WandrMe) January 29, 2016

The company is currently borrowing money to buy new planes rather than paying out of their cash reserves. This prevents realizing the investment grade rating but, as Parker notes, he’s already borrowing that money at 4%, below what some other investment grade companies are getting as interest rates. Maybe because the new planes are so easy to place elsewhere or maybe because he and his team are that incredible at negotiating loan terms. He did suggest that, “If indeed we get to a point where it gets more expensive to borrow against airplanes we may decide to pay cash for aircraft.”

But Parker has a point. The analysts are tracking certain metrics but it is unclear that those metrics apply directly to the modern airline industry today. Parker continued on this same track of thinking later in the call, essentially questioning if the analysts even understand the industry anymore. Responding to a query from Helene Becker Parker started by saying he’s quite certain she isn’t in the group who “doesn’t get it” and then launched into something of a diatribe.

This call so far is indicative of what we’re hearing, “Gee, you’re not retaining [the profits], fares are down because fuel prices are down, you’re paying your employees more.” It feels a lot to me like focusing on the trees instead of the forest. And the reality is we are producing record profits, margins that are higher than our peers, and if you look to the cash flow instead of wishing they are higher I cannot imagine how you think the stock is undervalued; we certainly don’t. I think that’s what is being missed. People tend to look to expectations and say, “Gee, if oil is at $30 and last year it was whatever why aren’t earnings much higher?” And there are many reasons for that; we’re happy to explain them. But if you went and built a model that says everything that happens in fuel price is going to result in higher earnings you are, of course, going to be disappointed.

Maybe we missed it by not explaining that well enough to people.

This is a business that is so dramatically different than anybody’s seen before that they still can’t figure it out. And every time you see “Oil prices went down and wages went up, oh, here you guys go again.” And nothing could be further from the truth. What’s happening is that it is an industry that is starting to behave like an industry. And people who have worked hard in the industry are starting to get their compensation back to where it belongs.

I’ve never seen a bigger disconnect, in some sense that’s good…but there are investors that get it and we think they’ll do well.

And this is not the first time he’s gone down that path.

Back to the “investment grade” topic, Parker added this in response to a separate question:

We have paid down all the high cost debt in the company. We are investing in to the airline everywhere we think makes sense – billions and billions of dollars. We are spending and improving this airline in ways which we think are going to provide really nice returns for our investors going forward. …And if we have extra cash that goes to you guys, we return it to you. That’s what we think is the best thing to do for our shareholders. And I believe the market will, indeed, reward that, whether now or later. But that’s the right way to manage the cash generated from the company.

Look, we care about the rating, of course. We work well with the rating agencies. We just have a different view from some of our competitors of what the right leverage amounts are and it doesn’t make sense to us at this point.

Again, he suggests that the company is running the smartest way it can to make the most profits, even if that doesn’t match what the “investment grade” rules say.

If you're wondering why Doug Parker is giving AAL stock a long promotional blurb today, recall that he is paid in stock. #stocks #airlines

— justinbachman (@justinbachman) January 29, 2016

Parker’s earnings are defined by the share price so it is no surprise he’s trying to convince the analysts to boost their targets. But it is also hard to say whether he’s definitely right or wrong. Far more likely is that this is a gray area and he’s somewhere in the spectrum, just like everyone else. Alas, the focus of Wall Street on quarterly earnings rather than a longer term view makes it hard to know just what is right, or to know if there will be a chance to do “it” during a CEO’s reign if the results do not come quickly enough. But Parker has been around for a while now and shows no signs of backing down, even if others in the industry are getting pushed out for not delivering quickly enough.