Imperial Capital Cuts American Airlines Estimates, But Maintains Outperform Rating

In a report published Wednesday, Imperial Capital analyst Bob McAdoo maintained an Outperform rating on

, while lowering the price target from $82 to $73. Although the 2Q15 estimates have been lowered, following the revision in the company's guidance, the analyst believes that 2Q could be a record quarter for American Airlines' earnings and margins. "Recent operating results and management commentary continue to provide us with confidence in the company's ability to build on 2014's record results. Despite what we expect to be the highest 2Q15 pre-tax margins among the legacy carriers, American Airlines continues to trade at a significant discount to peers… we still expect record 2015 pre-tax margins at American to surpass peers by more than 100bp," McAdoo said. The analyst also believes that the company no fuel hedging policy would lead to annualized cost savings of about $4 billion, which is the highest among the US airlines. The company is expected to pass on a significant portion of its cost savings to its investors in the form of additional share buybacks and the retirement of its high interest debt. American Airlines, however, decreased its PRASM guidance, possibly due to weaker pricing in some markets on close in bookings. The analyst believes that the weakness is "occurring in markets in which some competitors have added meaningful capacity including Dallas, Chicago, Washington DC, and South Florida." According to the Imperial Capital report, the company indicated during its 1Q15 results announcement that several issues were likely to pressurize unit revenue trends in 2Q15, including Fx headwinds, the end of some fuel surcharges, some leftover impact from Venezuela and increased competitive capacity. "American Airlines did indicate that the second quarter would face the most challenging year-over-year PRASM comps and we expect trends to improve during the second half of the year," McAdoo added. The 2Q15 and FY2015 estimates have been lowered to reflect the revised company guidance.