American Airlines Group (AAL) Bankruptcy Hides Transition to a “New American” LONG, TP $46 (+30%)

RESEARCH TEAM

Parker Kim, Senior Director Mark Albin, Senior Analyst Charlene Shu, Junior Analyst Christopher Boyd, Analyst Daniel Chen, Analyst Karsic Ma, Analyst

September 2014

Table of Contents

Investment Thesis Parker Kim

Company Overview Daniel Chen

Industry Overview Christopher Boyd

Competitive Overview Karsic Ma

Financial Overview Mark Albin

Risk Overview Charlene Shu

Investment Thesis

September 2014

Investment Thesis Investors Need More Evidence to be Convinced

AAL P/E Shows Underappreciation

Despite Becoming a Dominant Player

Why does AAL trade at discount to its peers

despite having superior market share and

profitability?

We believe the market is holding American back because

they can’t let go of its turbulent past and are waiting

for merger execution.

September 2014

Investment Thesis The “New American” Isn’t Just a Slogan

AAL Yields Have Grown the Most

Margins Closing in on “Best-in-Class”

Despite negative investor sentiment, we believe that

Network Quality

+

Yield Growth

+

Profitability Gains

Indicate AAL both has been and will continue to be successful in

executing the US Airways merger

Company Overview

September 2014

Company Overview An International Network Carrier with Strong Market Share

Airline Carrier + Airfreight Services Recently emerged from bankruptcy

Fleet of 903 aircraft

Focus on fleet replacement and existing plane retrofitting to develop the most modern, efficient fleet

Largest and most extensive network in the US

Filed bankruptcy in Nov 2011 after it was unable to pay its high debt payments

Agreed to a merger with US airways and restructured its obligations to emerge as a more efficient airline with a stronger network

September 2014

Company Overview Competitive Advantage

Partnerships with other airlines strengthens international network

Frequent flier programs boosts customer retention

#1 network strength makes choosing AAL a logical choice

for frequent fliers

September 2014

Company Overview Post-Merger, US Airways Management Poised to Launch AAL

Doug Parker Chairman & CEO

Scott Kirby President

Derek Kerr CFO

Experienced US Airways management team is key to executing on merger benefits

Synergy Targets: $1.4bn PwC Study: cost-cutting, increased efficiency, stronger network Every performance metric has improved – approaching #1 rank

September 2014

Company Overview SWOT Analysis Indicates Opportunity in Pacific Markets

Strengths

Largest network Largest frequent flier program Experienced management team Excellent profitability margins

Merger execution risk High leverage risk from fleet

improvements

Continued growth in disposable income

Increased business travel aligns with strong business traveler exposure

Increased demand for Pacific travel

Technology-based disruptions in business travel (ie. Skype)

Frequent-flier stealing programs

Opportunities

Weaknesses

Threats

Industry Overview

September 2014

Industry Overview Market Forces Make Airlines a Tough but Feasible Play

Large start up costs to purchase planes discourage new entrants

Regulatory issues and airport leasing process make the startup path difficult

Low switching costs and few variations between AAL/DAL/UAL make customer retention difficult

However, frequent flier programs offset this

Competition is based on price which forces razor-thin profit margins

Differentiation difficult, focus is on frequent flier programs + comprehensive network

Leisure carriers are the most susceptible to alternatives in domestic travel

Only 2 major suppliers: Airbus + Boeing Recently, AAL has begun purchasing planes

from Airbus (previously only Boeing) Despite duopoly, pricing power remains fair

HIGH

MODERATE

HIGH

LOW

MODERATE

Porter’s Assessment Industry Dynamic Rationale

Barriers to Entry

Bargaining Power of Buyers

Intensity of Rivalry

Threat of Substitutes

Bargaining Power of Suppliers

September 2014

Industry Overview Post-Consolidation, Pricing Power Should Improve

Favorable Industry Environment

The major US carriers should continue to benefit from a landscape where consolidation has optimized load factors.

Strong demand is producing record load factors. Revenue optimization initiatives combined with structural cost reductions should drive industry profitability up.

September 2014

Industry Overview Industry Improvements Have Seen Tangible Success

US Airlines have begun generating economic returns

(ROIC > WACC) Cost reductions have successfully slowed cost growth

to ~3% per year (even less for AAL)

In the environment of consolidation, airlines have shifted their focus from aggressive market share warfare to optimizing their

internal processes.

Competitive Overview

September 2014

Competitive Overview Competitive Advantage leads to Revenue Success

AAL revenue per mile is continually growing and has recently moved to #2 in the industry.

While its cost per mile has run in line with network operators.

American holds the most market share in the largest market

segment

September 2014

Competitive Overview AAL’s Network Leads in Market Share

Financial Overview

September 2014

Financial Overview Seemingly Riskier Balance Sheet is not as Bad as Perceived

We project AAL’s total liquidity position ex-RCF to be between $10-12bn for 2014-2016

...but we forecast Debt / EBITDAR levels to normalize as cash flows mature and debt is paid down.

Liquidity as a % of LTM Revenue has topped the industry for the last year

AAL does have the largest debt position of its network peers…

September 2014

Financial Overview Seemingly Riskier Balance Sheet is not as Bad as Perceived

Free cash flow levels should begin to normalize to begin funding capital structure changes.

September 2014

Financial Overview Comparables Analysis Shows AAL Trades with US and RoW

Global Average: 7.8x

US Average: 7.1x

AAL 7.6x

September 2014

Financial Overview Comparables Analysis Shows AAL Trades with US and RoW

EV/EBITDAR

RO

IC

September 2014

Financial Overview AAL Represents Strong Upside Despite Negative Sentiment

2013A 2014E 2015E 2016E

EBITDAR, adj 5,744 7395 8779 9678

% Margin 14.2% 17.2% 19.4% 20.4%

Taxes -107 363 20 25

NOPAT 5,851 7,032 8,759 9,653

Capex -2,143 -2,813 -3,438

D&A 1,132 1,272 1,307 1,344

Change in NWC -150 -200 -300

Unlevered FCF 6,011 7,053 7,259

PVFCF 5,869 6,261 5,858

Projected Period EV 17,988

Terminal EV @ 4.7x 36,707

Enterprise Value 54,695

Less: Debt 22627

Plus: Cash 1140

Equity Value 33,208

Fully Diluted Shares Outstanding 720.5

Share Price $46.09

Blended UAL/DAL 2015E EV/EBITDAR, current EV/EBITDAR: 7.1x

Consensus estimates for EBITDAR

+30% upside

September 2014

Financial Overview Model Drivers: Unit Costs, Pricing, Utilization

2013A 1Q14A 2Q14A 3Q14A 4Q14E 2014E 2015E 2016E

Operating Statistics

RPMs 215,541 50,886 57,194 58,642 53,518 220,240 225,526 230,262

Y/Y change (%) 2.7% 1.7% 2.5% 2.1% 2.4% 2.2% 2.4% 2.1%

ASMs 259,914 63,392 68,090 69,119 65,232 265,833 272,213 277,385

Y/Y change (%) 2.1% 2.0% 3.1% 2.0% 2.0% 2.3% 2.4% 1.9%

Number of Aircraft in Fleet 1528 1537 1541 1540 1538 1538 1538 1538

Change since prior period end 38 9 4 -1 -2 -2 0 0

Fuel Price / gallon $3.08 $3.10 $3.03 $2.94 $2.99 $3.02 $3.05 $3.07

ASMs / gallon 60.5 61.2 61.3 61.6 61.7 61.5 61.3 61.6

Fuel cost as % of OpEx 34.9% 34.7% 33.8% 34.3% 33.9% 34.2% 34.6% 34.2%

Revenue & Costs / ASM

Yield (cents) 16.49 17.03 17.34 16.84 17 17.05 17.53 18.02

Y/Y change (%) 2.0% 3.2% 6.5% 2.0% 1.9% 3.4% 2.8% 2.8%

PRASM (cents) 13.67 13.67 14.57 14.28 13.95 14.13 14.53 14.96

Y/Y change (%) 2.6% 2.9% 5.9% 2.2% 2.3% 3.3% 2.8% 3.0%

CASM (cents) 9.13 9.75 9.31 9.15 9.46 9.46 9.38 9.57

Y/Y change (%) -2.5% 3.7% 2.4% 2.1% 2.1% 3.6% -0.8% 2.0%

Margins

EBIT Margin 8.1% 5.9% 14.5% 14.3% 10.6% 11.3% 13.8% 15.0%

Y/Y change (bps) 443bps 294bps 456bps 327bps 274bps 274bps 250bps 120bps

EBITDAR Margin 14.2% 12.2% 20.1% 20.0% 16.9% 17.2% 19.4% 20.4%

Y/Y change (bps) 459bps 294bps 415bps 305bps 266bps 298bps 218bps 103bps

Historical Projected

Risk Overview

September 2014

Risk Overview Execution Risk Limited- AAL Already Outpaces UAL and DAL

September 2014

Risk Overview General Risk Overview

Union Integration Fuel Price Risk Labor Cost Control

Association of Professional Flight Attendants voted last Wednesday and reached a 5-year agreement with AAL.

Integration issues between LCC-AMR unions resolved with this.

AAL has invested in newer and more comfortable planes to keep up with competition and lower fuel consumption.

Fuel costs represent ~35% of OpEx but should approach 32-33% by 2016.

Contract lasting through 2019 to be signed in December- includes modest 2% pay raises and shortening of pay ladder.

Overall should improve quality of life for personnel.

September 2014

Conclusion Investors aren’t Seeing the “New American”

Low Valuation

Strong operational success

Profitability gains

Investors are waiting to buy AAL because they are

afraid its recent merger will fail.

In reality, AAL has already begun to exhibit signs of merger success and could end up being the star of

the industry.

American Airlines Group (AAL) Appendix September 30, 2014

Research Team

Parker Kim, Senior Director Mark Albin, Senior Analyst Charlene Shu, Junior Analyst Christopher Boyd, Analyst Daniel Chen, Analyst Karsic Ma, Analyst

September 2014

Valuation Overview Revenue > EBIT Projections

2013A 2014E 2015E 2016E

Total Passenger Reveue 35,542 37,557 39,525 41,477

Y/Y change (%) 4.7% 5.7% 5.2% 4.9%

Cargo 830 861 888 897

Y/Y change (%) 0.1% 3.7% 3.1% 1.0%

Other 4,047 4,612 4,913 5,060

Y/Y change (%) 5.3% 14.0% 6.5% 3.0%

Total Operating Revenues 40,419 43,030 45,326 47,434

Y/Y change (%) 4.7% 6.5% 5.3% 4.7%

Fuel and Related Taxes 11,109 10,945 11,379 11,639

Salaries, Wages, and Benefits 7,887 8,422 8,585 9,146

Regional Op Expense 6,417 6,619 6,653 6,836

D&A 1,132 1,272 1,307 1,344

Aircraft Rent 1,336 1,275 1,215 1,227

Maintenance, Materials, and Repairs 1,927 1,916 1,963 2,002

Other Operating Expenses 8,032 7,734 7,966 8,133

Total Operating Expense 37,840 38183 39068 40327

Y/Y change (%) 0.6% 0.9% 2.3% 3.2%

EBIT 2,579 4847 6258 7107

Y/Y change (%) 158.4% 87.9% 29.1% 13.6%

September 2014

Valuation Overview Revenue > EBIT Projections

2013A 1Q14A 2Q14A 3Q14A 4Q14E 2014E 2015E 2016E

Operating Statistics

RPMs 215,541 50,886 57,194 58,642 53,518 220,240 225,526 230,262

Y/Y change (%) 2.7% 1.7% 2.5% 2.1% 2.4% 2.2% 2.4% 2.1%

ASMs 259,914 63,392 68,090 69,119 65,232 265,833 272,213 277,385

Y/Y change (%) 2.1% 2.0% 3.1% 2.0% 2.0% 2.3% 2.4% 1.9%

Number of Aircraft in Fleet 1528 1537 1541 1540 1538 1538 1538 1538

Change since prior period end 38 9 4 -1 -2 -2 0 0

Fuel Price / gallon $3.08 $3.10 $3.03 $2.94 $2.99 $3.02 $3.05 $3.07

ASMs / gallon 60.5 61.2 61.3 61.6 61.7 61.5 61.3 61.6

Fuel cost as % of OpEx 34.9% 34.7% 33.8% 34.3% 33.9% 34.2% 34.6% 34.2%

Revenue & Costs / ASM

Yield (cents) 16.49 17.03 17.34 16.84 17 17.05 17.53 18.02

Y/Y change (%) 2.0% 3.2% 6.5% 2.0% 1.9% 3.4% 2.8% 2.8%

PRASM (cents) 13.67 13.67 14.57 14.28 13.95 14.13 14.53 14.96

Y/Y change (%) 2.6% 2.9% 5.9% 2.2% 2.3% 3.3% 2.8% 3.0%

CASM (cents) 9.13 9.75 9.31 9.15 9.46 9.46 9.38 9.57

Y/Y change (%) -2.5% 3.7% 2.4% 2.1% 2.1% 3.6% -0.8% 2.0%

Margins

EBIT Margin 8.1% 5.9% 14.5% 14.3% 10.6% 11.3% 13.8% 15.0%

Y/Y change (bps) 443bps 294bps 456bps 327bps 274bps 274bps 250bps 120bps

EBITDAR Margin 14.2% 12.2% 20.1% 20.0% 16.9% 17.2% 19.4% 20.4%

Y/Y change (bps) 459bps 294bps 415bps 305bps 266bps 298bps 218bps 103bps

Historical Projected

September 2014

Appendix

http://online.wsj.com/articles/american-airlines-flight-attendants-reach-tentative-agreement-1411164253

http://www.dallasnews.com/business/airline-industry/20140919-american-airlines-reaches-tentative-agreement-with-flight-attendants-union.ece

https://www.iata.org/pressroom/facts_figures/fact_sheets/Documents/fuel-fact-sheet.pdf

http://marketrealist.com/2014/07/why-american-us-airways-merger-was-conditional/

http://www.aa.com/i18n/amrcorp/corporateInformation/facts/measurements.jsp

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjI0MDU2fENoaWxkSUQ9LTF8VHlwZT0z&t=1

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTQyODc4fENoaWxkSUQ9MjMzMjk3fFR5cGU9MQ==&t=1

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTQ2NTEwfENoaWxkSUQ9MjM4MDU0fFR5cGU9MQ==&t=1

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTU1MzM4fENoaWxkSUQ9MjUyMDU1fFR5cGU9MQ==&t=1

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTU1MzY0fENoaWxkSUQ9MjUyMDg4fFR5cGU9MQ==&t=1

http://aviationblog.dallasnews.com/2013/03/ceos-american-airlines-us-airways-will-bring-nothing-but-good-things.html/

September 2014

Appendix

September 2014

Appendix

September 2014

Appendix

September 2014

DO NOT WRITE OVER, TEMPLATE SLIDE

DON’T EVEN THINK ABOUT IT MISTER