American Airlines Group Inc. annual report, FY2019

American Airlines Group Inc. — 2019 Form 10-K Summary

Business context and reporting period

American Airlines Group Inc. (AAG) is a holding company whose principal operating subsidiary is American Airlines, Inc. The group operates a global network carrier with approximately 6,800 daily flights to more than 365 destinations in 61 countries. The filing covers the fiscal year ended December 31, 2019, with comparative 2018 results. The filing also provides unaudited fourth-quarter data.

Approximately 215 million passengers boarded AAG flights in 2019.
The fleet included 942 mainline aircraft and 605 regional aircraft at year-end.
AAG had approximately 133,700 active full-time equivalent employees; approximately 85% were union-represented.

Financial performance and key metrics

Metric	2019	2018	Change
Total operating revenue	$45.768 billion	$44.541 billion	+2.8%
Operating income	$3.065 billion	$2.656 billion	+15.4%
Operating margin	6.7%	6.0%	+0.7 percentage points
Pre-tax income	$2.256 billion	$1.884 billion	+19.7%
Net income	$1.686 billion	$1.412 billion	+19.4%
Net margin	3.7%	3.2%	+0.5 percentage points
Diluted EPS	$3.79	$3.03	+25.1%

Passenger revenue increased 3.3% to $42.010 billion. Revenue passenger miles rose 4.4%, available seat miles increased 1.1%, and passenger load factor improved 2.6 points to 84.6%.
Cargo revenue declined 14.8% to $863 million, primarily due to lower international freight volumes and schedule reductions.
Total revenue per available seat mile increased 1.7% to 16.05 cents.
Operating expenses rose 2.0% to $42.703 billion. Fuel expense declined 5.1% to $9.395 billion, while salaries, wages and benefits increased 2.9% to $12.609 billion.
Total CASM increased 0.9% to 14.98 cents. CASM excluding net special items and fuel increased 3.6% to 11.46 cents, reflecting higher maintenance, regional capacity and other operating costs.

Cash flow, debt and liquidity

Net cash provided by operating activities was $3.815 billion, compared with $3.533 billion in 2018.
Capital expenditures and aircraft purchase deposits were $4.268 billion; net cash used in investing activities was $2.243 billion.
Net cash used in financing activities was $1.568 billion, including $4.190 billion of debt and finance lease repayments, $1.097 billion of share repurchases and $178 million of dividend payments.
Available liquidity at December 31, 2019 was approximately $7.069 billion, comprising $3.826 billion of cash and short-term investments and $3.243 billion of undrawn revolving credit capacity. Restricted cash and short-term investments totaled $158 million.
Debt and finance leases totaled $24.315 billion, and operating lease liabilities totaled $9.129 billion. Stockholders’ equity was negative $118 million.
AAG issued approximately $4.0 billion of debt during 2019, including $750 million of 5.000% senior notes due 2022, and refinanced or repaid portions of existing borrowings.
Debt agreements generally require minimum aggregate liquidity of at least $2.0 billion. The company was in compliance with applicable collateral coverage tests at year-end.

Material changes versus the prior comparable period

Profitability improved despite only modest revenue growth, primarily because of lower fuel costs and higher passenger demand.
Maintenance, materials and repairs increased 16.1%, and regional expenses increased because of higher regional capacity.
AAG contributed $1.230 billion to defined benefit pension plans in 2019, versus $475 million in 2018. Pension and postretirement obligations declined to $6.081 billion from $6.937 billion, but remain material.
The company repurchased 33.8 million shares for $1.1 billion in 2019, versus 16.6 million shares for $800 million in 2018. Remaining authorization under the current program was $565 million at year-end.
Operating lease liabilities declined from $9.556 billion to $9.129 billion. The company had adopted the new lease accounting standard effective January 1, 2018.
Fourth-quarter 2019 operating revenue was $11.313 billion, operating income was $729 million and net income was $414 million, compared with fourth-quarter 2018 revenue of $10.938 billion, operating income of $571 million and net income of $325 million.

Guidance, outlook, commentary, risks and unusual items

The Boeing 737 MAX grounding caused approximately 27,600 canceled flights in 2019 and was estimated to have reduced 2019 financial results by approximately $540 million. A confidential settlement with Boeing was reached in January 2020; substantially all compensation was recorded as a reduction of aircraft cost basis and future deliveries rather than 2019 earnings.
All 24 Boeing 737 MAX aircraft in the fleet remained grounded as of the filing date, and the company removed MAX flying from its schedule through August 17, 2020. AAG had 76 MAX aircraft on order, making delivery timing and financing uncertain.
The TWU-IAM Association conducted an illegal work slowdown in 2019 that caused significant cancellations and delays. Agreements in principle were reached in January 2020, subject to ratification. Pilot and flight attendant agreements also became amendable around year-end or early 2020.
AAG does not hedge aircraft fuel consumption and therefore remains fully exposed to fuel-price volatility. Management estimated that a one-cent-per-gallon increase would raise 2020 fuel expense by approximately $47 million.
As of the filing date, the company disclosed the coronavirus outbreak originating in Wuhan, China, including suspended service to the region and expected lost revenue from reduced travel demand.
Other significant risks include high leverage, floating-rate debt and LIBOR transition, economic and geopolitical conditions, foreign currency exposure, labor disruptions, pilot shortages, airport and slot constraints, cybersecurity incidents, dependence on aircraft and regional-carrier suppliers, environmental regulation and severe weather.
2019 net special items totaled $644 million, including $271 million of fleet restructuring, $213 million of fleet impairment, $191 million of merger integration costs, an $11 million credit from bankruptcy-obligation mark-to-market adjustments and a $53 million litigation-reserve credit.
AAG had $12.950 billion of aircraft and certain engine purchase commitments and $8.982 billion of minimum obligations under third-party regional capacity purchase agreements.
Management reported effective disclosure controls and internal control over financial reporting. KPMG issued unqualified audit opinions.

Most important facts for an investor to verify

Whether the company’s substantial debt, lease liabilities, pension obligations and aircraft commitments remain supportable under weaker travel demand or higher fuel prices.
The timing, operational impact, financing and compensation associated with the Boeing 737 MAX return to service and future deliveries.
The status and cost implications of labor negotiations, ratification of the January 2020 agreements and any recurrence of operational slowdowns.
Actual 2020 passenger demand and the financial impact of the coronavirus outbreak, international schedule changes and other economic disruptions.
Whether cost inflation, particularly maintenance, labor, airport and regional-carrier costs, continues to exceed revenue growth.
The sustainability of share repurchases and dividends given negative AAG stockholders’ equity, capital expenditures, debt maturities and liquidity covenants.
Key estimates underlying passenger revenue, unused tickets, the $8.615 billion loyalty-program liability, pension obligations and asset impairment testing.