American Airlines Group Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG) and wholly owned subsidiary American Airlines, Inc. filed unaudited quarterly reports for the three months ended March 31, 2019. The company operates approximately 6,700 daily flights to nearly 350 destinations in more than 50 countries and reported approximately 50 million passengers in the quarter.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total operating revenue | $10.584 billion | $10.401 billion | 1.8% increase |
| Operating income | $375 million | $396 million | 5.4% decrease |
| Operating margin | 3.5% | 3.8% | Down approximately 0.3 points |
| Pre-tax income | $245 million | $238 million | 3.2% increase |
| Net income | $185 million | $159 million | 16.4% increase |
| Diluted EPS | $0.41 | $0.34 | Increase |
| Net margin | 1.7% | 1.5% | Improved |
| Operating cash flow | $1.651 billion | $1.800 billion | Decrease of $149 million |
Passenger revenue increased 1.9% to $9.658 billion, while cargo revenue declined 4.0% to $218 million. Passenger demand and load factor supported revenue growth: revenue passenger miles increased 3.5%, available seat miles increased 1.3%, and load factor improved to 82.2% from 80.4%.
Operating expenses increased 2.0% to $10.209 billion. Salaries, wages and benefits increased 2.5%, maintenance expense increased 19.7%, and depreciation and amortization increased 9.1%. Fuel expense declined 2.1% to $1.726 billion, reflecting lower fuel prices partly offset by higher consumption.
Total CASM increased to 15.31 cents from 15.20 cents. CASM excluding special items and fuel increased 2.7% to 11.88 cents. TRASM increased 0.5% to 15.87 cents.
Liquidity, debt and capital allocation
- AAG reported approximately $7.2 billion of available liquidity at March 31, 2019, consisting of $4.4 billion of unrestricted cash and short-term investments and $2.8 billion of undrawn revolving credit facilities. Restricted cash and short-term investments were $156 million.
- AAG had $23.6 billion of long-term debt, including $3.3 billion of current maturities. American had $22.3 billion of long-term debt, including $2.0 billion of current maturities.
- Debt included $750 million of 5.50% senior notes due October 2019 and $500 million of 4.625% senior notes due March 2020.
- The company issued $400 million of aircraft-related debt and generated $352 million from aircraft sale-leaseback transactions during the quarter.
- Capital expenditures and aircraft purchase deposits were $1.305 billion, including aircraft deliveries and deposits for Embraer, Boeing and Airbus aircraft.
- AAG repurchased $600 million of common stock, or 16.7 million shares, and paid $46 million of dividends. Approximately $1.1 billion remained available under the current repurchase authorization at March 31, 2019.
- Defined benefit pension contributions were $364 million, compared with $155 million in the prior-year quarter.
Material changes versus the prior comparable period
- GAAP net income increased despite lower operating income, primarily because of lower net special items, higher revenue and a lower income tax provision.
- Pre-tax income excluding special items declined to $314 million from $463 million, a 32.2% decrease. Higher maintenance costs and labor expense more than offset revenue growth.
- Net operating special items declined to $138 million from $225 million. Q1 2019 items primarily comprised fleet restructuring expenses of $83 million, merger integration expenses of $37 million and other operating charges of $18 million.
- Q1 2019 included a $69 million net nonoperating special credit, principally unrealized mark-to-market gains on equity investments. The prior-year quarter had no comparable nonoperating special item.
- Cash flow from operations declined 8.3%, while capital expenditures increased substantially from $779 million to $1.305 billion and debt repayments increased from $568 million to $849 million.
- The company adopted ASU 2018-02 and reclassified $622 million of stranded tax effects from accumulated other comprehensive loss to retained earnings. Prior periods were recast for the lease standard adopted in 2018.
Guidance, outlook, commentary and unusual items
- The FAA grounded all U.S.-registered Boeing 737 MAX aircraft in March 2019. AAG had 24 737 MAX aircraft in its fleet and 76 on order. The company removed MAX flying from its schedule through August 19, 2019, representing approximately 115 flights per day and about 2% of summer daily capacity.
- Groundings and related cancellations reduced Q1 2019 pre-tax income by approximately $80 million. Management estimated that MAX cancellations through August 19, 2019 could reduce 2019 pre-tax income by approximately $350 million.
- An additional 14 Boeing 737-800 aircraft were temporarily removed from service for interior remediation, resulting in approximately 940 cancelled flights in Q1; all had returned to service by the filing date.
- AAG had no fuel hedging contracts outstanding and was therefore fully exposed to fuel-price changes. Management estimated that a one-cent-per-gallon increase in aviation fuel prices would increase 2019 annual fuel expense by approximately $46 million.
- Aircraft and engine purchase commitments totaled approximately $13.7 billion for American, with 264 aircraft scheduled for delivery across the stated periods. The company estimated aggregate aircraft and certain engine expenditures of approximately $8.4 billion for 2019 through 2023.
- Management stated that financing commitments covered aircraft scheduled for delivery through December 2019, except for three Embraer E175 aircraft, but financing was not committed for many later deliveries.
Risks, contingencies and legal matters
- Material risks include the 737 MAX grounding, fuel-price volatility, high leverage, variable-rate debt, pension funding, aircraft financing needs, labor costs and pilot shortages, economic downturns, intense competition, operational disruptions and technology or cybersecurity failures.
- Approximately 84% of employees were represented by labor unions as of December 31, 2018. Labor negotiations and potential wage increases could pressure costs.
- AAG is subject to approximately 100 putative class-action lawsuits concerning alleged agreements related to passenger capacity. A preliminary $45 million settlement of U.S. class claims had received preliminary court approval but remained subject to final approval.
- A merger-related antitrust lawsuit proceeded through a bench trial in March 2019; closing arguments were scheduled for April 26, 2019. Management considered the claims without merit.
- The Department of Justice continued investigating American’s 2009 and 2011 contracts with the U.S. Postal Service for potential False Claims Act or other violations.
- Total contractual obligations reported for AAG were approximately $70.4 billion, including debt principal and interest, aircraft purchases, leases, regional capacity commitments, pension obligations and other purchase commitments.
- Management stated that disclosure controls and procedures were effective as of March 31, 2019, at the reasonable assurance level.
Investor verification checklist
- Verify the duration and final financial impact of the Boeing 737 MAX grounding, including delivery delays and any schedule changes after August 19, 2019.
- Assess whether maintenance, labor and regional operating-cost growth continues to exceed revenue growth.
- Review near-term debt maturities, refinancing requirements and compliance with liquidity and collateral covenants.
- Evaluate the company’s ability to finance aircraft commitments, particularly deliveries after 2019 and aircraft without committed financing.
- Monitor fuel prices, the company’s decision not to hedge fuel, and the sensitivity of earnings and cash flow to fuel-cost increases.
- Track pension contributions and the effect of pension obligations on liquidity.
- Follow the passenger-capacity antitrust settlement, merger-related litigation and DOJ Postal Service investigation.
- Reconcile GAAP results with management’s non-GAAP measures, particularly the significant decline in pre-tax income excluding special items.