Premium Cabin Expansion And Fleet Modernization Will Support A Stronger Long Term Outlook

Catalysts

About Grupo Aeroméxico. de

Grupo Aeroméxico operates a full service airline focused on domestic and international passenger travel with a premium positioning in Mexico.

What are the underlying business or industry changes driving this perspective?

• Premium cabins and products now generate about 42% of passenger revenue, around 17 points above pre pandemic levels. This supports higher yields and can be supportive for overall revenue and net margins.
• Selective long haul expansion, including routes such as Mexico City to Barcelona and Monterrey to Paris, positions the airline to capture resilient international demand. This can lift passenger revenue and earnings over time.
• Fleet modernization with 17 additional MAX aircraft and planned widebody deliveries is expected to improve fuel efficiency and aircraft utilization. This can support lower unit costs and stronger operating margins.
• Rising participation in the loyalty program, now at about 37% of customers, and new co branded credit cards with partners including American Express are designed to deepen customer engagement. These initiatives can add high margin revenue streams and support earnings stability.
• Industry leading on time performance, safety recognition from IATA and a clear focus on being the only true premium product in Mexico help differentiate the brand. This can sustain pricing power and support both revenue growth and net margins.
• Existing aircraft capacity and current utilization levels, especially on narrowbody jets, give room to grow ASKs without large incremental capital outlays. This can increase operating leverage and support EBITDAR and operating income.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Grupo Aeroméxico. de compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Grupo Aeroméxico. de's revenue will grow by 6.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.2% today to 8.4% in 3 years time.
• The bullish analysts expect earnings to reach $563.8 million (and earnings per share of $3.76) by about July 2029, up from $340.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $412.0 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.4x on those 2029 earnings, up from 7.1x today. This future PE is greater than the current PE for the US Airlines industry at 11.4x.
• The bullish analysts expect the number of shares outstanding to grow by 6.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Premium cabins currently generate about 42% of passenger revenue and have been a key profit driver. A long term shift in customer behavior, competitive pressure from low cost carriers or economic stress on higher income travelers could reduce willingness to pay for premium products, which would pressure yields and put both revenue and net margins at risk.
• The investment case leans heavily on long haul and transborder growth. Ongoing or renewed regulatory constraints on Mexico to U.S. routes, or changes to open skies and slot rules at Mexico City airports, could limit capacity deployment, reduce network flexibility and cap future growth in passenger revenue and earnings.
• Grupo Aeroméxico is committing to fleet growth with 17 recently added MAX aircraft and more widebodies coming. While management sees room to increase utilization, a prolonged period of softer demand, particularly in domestic border cities or key international markets, could leave aircraft underutilized and raise unit costs, which would weigh on operating income and net margins.
• A strong Mexican peso affects the business on several fronts. While management highlights a natural hedge and some demand benefits, a sustained currency appreciation can inflate peso denominated costs and mechanically compress margins when reported in dollars, which would put pressure on EBITDAR margins and operating income even if headline revenue holds up.
• The current narrative relies on cost discipline and operational leverage from existing assets. Structurally higher labor expenses after collective bargaining, higher ownership costs from a larger leased fleet and ongoing investments in technology, lounges and customer experience could keep CASM ex fuel elevated, limiting the benefit from revenue growth and constraining long term earnings expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Grupo Aeroméxico. de is $30.0, which represents up to two standard deviations above the consensus price target of $27.1. This valuation is based on what can be assumed as the expectations of Grupo Aeroméxico. de's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $6.7 billion, earnings will come to $563.8 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 15.0%.
• Given the current share price of $16.62, the analyst price target of $30.0 is 44.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.