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Doug Parker: ‘Our stock is so undervalued it defies logic’

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American Airlines chairman and CEO Doug Parker believes American is positioned to average $5 billion in pre-tax income per year over the long term, which he concedes is a level of earnings “no one has ever fathomed before” for an airline.

Speaking to analysts recently, Parker acknowledged that the airline industry is still a “volatile” business. But, he said, the $5 billion pre-tax average is realistic. In better years, American could earn in the $7 billion range. In off years, in the $3 billion range.

If Parker is right about this, “our stock is so undervalued it defies logic,” he said.

Parker believes American, and the US airline industry more generally, has transformed and is now managed in a way that virtually ensures long-term value for shareholders. Nevertheless, the stocks of American and other US carriers remain priced stubbornly low and have been very slow to grow. Last week’s announcement by American that it was giving its pilots and flight attendants a mid-contract pay raise—which Parker strongly defended as a necessary long-term investment—was greeted with skepticism on Wall Street.

“It’s a move that might surprise or even dismay some of you,” Parker acknowledged to Wall Street analysts.

What will it take for the investment community to buy into the notion that US airlines have indeed transformed and are safe—and even forward-thinking—investments? “Time,” IATA chief economist Brian Pearce told me this week at the Wings of Change conference in Miami. Airlines have to keep proving it, quarter after quarter.

Parker, in what he jokingly described as “my tirade,” expressed why he believes the proof is already there. “Why it is that that we are so undervalued relative to other industries?” he asked rhetorically. “The reason I get is, ‘Well, it’s because investors are afraid you guys are going to do all the things you’ve done in the past to eliminate value.’ And as someone who's been around through all those years, I know what those things are and were: Once you start making money, you’ll grow faster than demand. Once you start making money, you’ll give more to labor than you did when you were making less money, and they’ll take some of the upside that should go to shareholders. Fuel prices will go up, and you guys won’t be able to react.”

Parker continued: “I would just point out this. In the last three years, all those things have happened. Capacity has grown in excess of demand in the last couple years and, as a result, unit revenues have fallen at rates that we haven’t seen in this business since 9/11. Probably more than they’ve ever fallen over a two-year period at any point in time. So unit revenues have declined because we’ve added more capacity than there is demand. Employee pay has increased at a rate that has never been seen before. And so that’s happened. Fuel prices, indeed, have increased from where they were a year ago by 20%, 30%. So all that stuff has happened, and yet here we are.”

Parker pointed out that earnings in 2017 may be lower than 2016, but American is still well within the $3 billion-$7 billion pre-tax income range and the US airline industry generally is poised for another year of healthy profitability.

“So look, all of that stuff has happened,” Parker reiterated. “All the things that people were worried about we’ve done and we still have a business that is producing returns like it’s never seen before.”

Wall Street is still demanding more proof.

“We will see over time,” Parker said. “But I can’t stress enough how bullish we are on the future.”

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