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American Airlines Predicts Cash Buildup As Costly Fleet Renewal Subsides

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American Airlines (NYSE: AAL) won't have to make any major fleet decisions for at least six years after completing a $30 billion, multiyear modernization program, positioning American to significantly increase free cash flow and returns to shareholders, according to company executives.

Since 2013, the Dallas-based airline has replaced nearly 500 aircraft and now has about 934 mainline planes. The renewal program transformed its aging fleet into the youngest of the global U.S. network carriers.

Two months ago American, the third-largest U.S. carrier in terms of passengers boarded, retired the last 26 McDonnell Douglas MD-80s, its domestic workhorse for about 30 years. By 2021, it will have phased out its 15 remaining Boeing 767-300 widebody planes and will have 24 Boeing 757 narrowbodies, down from 34 today. Last year, American ordered 47 additional Boeing 787-8 and 787-9 long-range jets to replace the 767s and other older widebody aircraft.

And in June, it ordered 50 extra-long-range Airbus A321XLR planes that the manufacturer says will burn 30% less fuel than previous generation planes. Deliveries begin in 2023.

The investments were "necessary to integrate and upgrade two airlines [from the merger of American and US Airways] that had suffered a lack of investment, and most importantly, to modernize an aging fleet. That work is now done and we anticipate our capital expenditure requirements will fall from the over $5 billion per year for the past six years to $3.7 billion in 2020, $2.1 billion in 2021, and should average approximately $3 billion thereafter," Chairman and CEO Doug Parker said on an Oct. 24 earnings call with analysts.

American will have until 2025 to begin thinking about renewal plans for its 181 A319/A320 single-aisle aircraft, which have an average age of 15 years today, Parker said.

Only 10% of American's fleet is 20 years or older, compared with about a third of the fleet at competitors United Airlines (NASDAQ: UAL) and Delta Air Lines (NYSE: DAL), Chief Financial Officer Derek Kerr said.

"Over half of our fleet is zero to 10 years," Kerr said. "It took us awhile to get there. We had to spend a lot to do it. But we feel really good about where we are with our fleet and certainly relative to our cash needs versus our competitors going forward."

The reduced need for new aircraft will translate into free cash flow — the money remaining after financing to maintain or expand the asset base — of $2.5 billion in 2020 and $3 billion in 2021, assuming constant earnings at 2019 levels. The carrier will use that money to pay off debt and return money to shareholders by repurchasing shares, executives said.

American Airlines expects its 2019 diluted earnings per share excluding net special items to be between $4.50 and $5.50, with higher earnings after that.

"That's $5.5 billion in free cash flow in just two years at a company that has a current market capitalization of approximately $12.5 billion, or a 44% free cash flow yield over just two years," Parker said. "We expect adjusted net debt will fall by approximately $3 billion to $4 billion in the next two years and by $8 billion to $10 billion over the next five years."

Tariff Trouble

American took delivery of its first 12 Airbus A321neo aircraft this year and is scheduled to receive 38 more of the fuel-efficient planes through 2021.

Kerr said nine planes next year will be built at Airbus' plant in Mobile, Alabama, and six in Hamburg, Germany, with the manufacturing location of six more to be determined.

Where the planes are built took on greater importance after the U.S. government imposed 10% tariffs on large aircraft from Europe in mid-October to stop illegal European Union subsidies for Airbus and compensate the U.S. for any resulting economic harm.

"We're doing everything we can to talk to Airbus, to try to get them out of Mobile and make sure that those aircraft come from that manufacturing facility instead of Hamburg," Kerr said.

Parker suggested that American would ask Airbus to assume the higher cost of the delivered planes.

"We really hope that it never gets to that point. The answer to this is not to keep escalating and having tariffs on both sides. The answer to this is for the European Commission [and] the U.S. Trade Representative to sit down and work this out in a way that doesn't have tariffs going places. But if they can't do that, we're certain that the goal of the [trade representative] was not to have these tariffs paid by U.S. airlines and then passed on to U.S. [customers]," he said.

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