American Airlines Cut At Credit Suisse, Calls January Upgrade Too Optimistic

American Airlines Group Inc AAL may face significant headwinds through 2017, Credit Suisse’s Julie Yates said in a report. She downgraded the rating for the company from Outperform to Underperform, while slashing the price target from $47 to $28.

Analyst Julie Yates mentioned that American Airlines has high leverage and abysmal free cash flow. The company’s FCF is likely to worsen in 2017, as fuel costs rise.

“Until industry fundamentals show marked improvement, we don’t think investors will have the appetite for AAL's leverage,” Yates wrote. She added that despite the lack of cash flow support, American Airlines’ shares were more expensive than peers on EV/EBITDAR.

Related Link: Boeing, Airbus Talks With Iran "Ongoing"

Headwinds Ahead

Rising fuel pressures would impact American Airlines most significantly, since the company is unhedged and has enjoyed the lowest per gallon price. For the company to offset the y/y rise in fuel in 2017, PRASM would need to increase by more than 1 percent in order to cross the $1.1B mark in higher fuel costs.

“Based on the mid-single digit PRASM declines in H1'16 and muted improvement likely in H2'16, this seems increasingly unlikely when looking at the sequential improvement required in 2017 to achieve such a result,” the analyst commented.

Yates added that there was greater optimistic in January on the industry as well as American Airlines, which is why the stock had been upgraded. Since then, fuel had surged, while yields “don’t appear to be following anytime soon.”