American Airlines Group Inc. quarterly report, Q3 FY2020

American Airlines Group Inc. 2020 Q3 SEC Filing Summary

Business context and reporting period

American Airlines Group Inc. (AAG), including wholly owned American Airlines, Inc., filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Results were dominated by the COVID-19 pandemic, government travel restrictions and an unprecedented decline in air-travel demand.

Key financial metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Total operating revenue	$3.173 billion	$11.911 billion	$13.309 billion	$34.455 billion
Operating income (loss)	$(2.871) billion	$808 million	$(7.906) billion	$2.336 billion
Net income (loss)	$(2.399) billion	$425 million	$(6.707) billion	$1.272 billion
Basic diluted EPS	$(4.71)	$0.96	$(14.76)	$2.85/$2.84
Operating margin	(90.5%)	6.8%	(59.4%)	6.8%
Net margin	(75.6%)	3.6%	(50.4%)	3.7%
Operating cash flow	Not separately provided	Not separately provided	$(3.680) billion	$3.215 billion

Q3 passenger revenue fell 76.9% to $2.540 billion, while cargo revenue was broadly stable at $207 million. Other revenue declined 39.9% to $426 million. Revenue passenger miles decreased 72.1%, available seat miles decreased 59.4%, and passenger load factor fell 26.7 points to 58.9%.

Q3 total revenue per available seat mile declined 34.4% to 10.31 cents. Total operating cost per available seat mile increased 34.2% to 19.64 cents; excluding special items and fuel, CASM increased to 19.34 cents from 11.07 cents. The reported cost structure reflects substantially reduced capacity and fixed costs that could not decline proportionately.

Liquidity, debt and balance sheet

At September 30, 2020, AAG reported $13.6 billion of total available liquidity, including approximately $8.3 billion of unrestricted cash and short-term investments, $4.9 billion of undrawn Treasury term-loan capacity and $400 million of undrawn revolving capacity.
Cash and short-term investments were $8.284 billion, compared with $3.826 billion at December 31, 2019. Restricted cash and short-term investments were $508 million.
Gross long-term debt was $33.0 billion, including $2.6 billion of current maturities, versus $23.9 billion at year-end 2019. Long-term debt, net of current maturities and discounts, was $29.6 billion.
Stockholders’ deficit was $5.528 billion at September 30, 2020, compared with a deficit of $118 million at December 31, 2019.
AAG raised $11.564 billion through debt issuance and $1.527 billion through equity issuance during the first nine months. It issued 85.2 million common shares for net proceeds of approximately $1.1 billion.

Material changes versus the prior comparable period

COVID-19 reduced Q3 revenue by 73.4% and nine-month revenue by 61.4% year over year.
Q3 operating expenses decreased 45.6%, substantially less than the revenue decline. Salaries, wages and benefits declined 16.0%, and fuel expense declined 77.2% due to lower flying and fuel prices.
AAG used $3.680 billion in operating cash during the first nine months, compared with $3.215 billion of operating cash generation in 2019.
Q3 net loss included a $519 million operating special-item credit, principally $2.136 billion of recognized Payroll Support Program assistance offset by $875 million of severance and fleet-related charges. Excluding total net special items, Q3 pre-tax loss was $3.635 billion versus pre-tax income of $835 million in 2019.
AAG recorded $1.5 billion of primarily non-cash fleet impairment charges during the first nine months and accelerated retirement of several aircraft types, including Airbus A330, Boeing 757 and 767, Embraer 190, Embraer 140 and Bombardier CRJ200 aircraft.
Approximately 19,000 employees were furloughed beginning October 1, 2020, after CARES Act restrictions on involuntary furloughs expired. More than 20,000 employees elected early retirement or long-term paid leave.

Guidance, outlook, commentary and unusual items

Management expected operating results for the remainder of 2020 to remain severely impacted by COVID-19 and stated that demand, travel restrictions and future capacity were highly uncertain.
Q3 flying capacity was down 59% year over year; Q4 capacity was expected to be down more than 50%, with long-haul international capacity down approximately 75%. Summer 2021 long-haul international capacity was expected to be 25% below 2019 levels, with 19 international routes being exited.
Management estimated approximately $17.0 billion of 2020 operating and capital expenditure reductions through capacity cuts, fleet actions, labor programs and other cost controls.
AAG received approximately $6.0 billion under the CARES Act Payroll Support Program. Approximately $4.2 billion was recognized as a special-item credit, while approximately $1.8 billion was recorded as an unsecured promissory note and warrants for approximately 14.1 million shares.
As of September 30, AAG had drawn $550 million under a Treasury secured term-loan facility. The commitment was subsequently increased from $5.5 billion to $7.5 billion on October 21, 2020; additional Treasury warrants could cover up to approximately 60 million shares if fully drawn.
Capital returns were suspended. CARES Act and Treasury-loan restrictions prohibit share repurchases and dividends for specified periods and restrict executive compensation.
Other unusual charges included a $410 million special charge for enhanced retiree medical benefits, $1.4 billion of severance expense for the first nine months and $228 million of labor-contract expense.
Management stated that it expected to meet cash obligations and remain in compliance with debt covenants for the next 12 months, based on current liquidity, anticipated financing and government assistance, and projected operating cash flows.

Principal risks and contingencies

The duration of COVID-19, future travel restrictions, demand recovery and possible permanent changes in business travel remain uncertain.
High leverage, significant aircraft, lease, pension and regional capacity-purchase commitments, and extensive collateral pledges may constrain financial flexibility.
Debt agreements generally require minimum liquidity of approximately $2.0 billion and include collateral coverage, debt-service coverage, cross-default and other restrictive covenants.
A Treasury-loan debt-service coverage shortfall could require a portion of AAdvantage loyalty-program revenue to be placed into blocked accounts or used for mandatory debt prepayments.
AAG had approximately $12.8 billion of LIBOR-based borrowings and had not hedged its floating-rate debt exposure; the transition away from LIBOR could increase borrowing costs or create refinancing uncertainty.
The company had 230 aircraft on firm order as of September 30, 2020, with approximately $11.8 billion of American aircraft and engine purchase commitments. Boeing 737 MAX delivery timing and financing remained uncertain.
Fuel prices, foreign exchange, labor relations, regional-carrier financial health, regulatory changes, litigation, slot retention, cybersecurity and potential additional asset impairments could materially affect results.
Pending matters included appeals related to a $45 million passenger-capacity antitrust settlement and unresolved private antitrust litigation related to the 2013 merger. The filing states that outcomes could be material but cannot be predicted.

Important facts for investors to verify

Whether travel demand and load factors recover sufficiently to reduce ongoing operating cash burn.
The remaining availability, collateral requirements and covenant headroom under the Treasury facility and other secured financings.
The timing and cost of debt maturities, pension contributions, aircraft deliveries and employee severance payments.
The dilution potential from approximately 14.1 million Payroll Support Program warrants, Treasury-loan warrants that could reach approximately 60 million shares, and the convertible notes.
Whether further fleet, goodwill or intangible-asset impairments are required as pandemic assumptions change.
The treatment and sustainability of government assistance, including the extent to which reported earnings benefit from special-item credits rather than recurring operating performance.