Business Context and Reporting Period
American Airlines Group Inc. (AAG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. AAG consolidates American Airlines, Inc. and its subsidiaries. The airline operated nearly 6,800 daily flights to more than 365 destinations in over 60 countries and carried approximately 55 million passengers during the second quarter.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Operating revenue | $11.96 billion | $11.64 billion | 2.7% increase |
| Operating income | $1.15 billion | $1.00 billion | 14.8% increase |
| Operating margin | 9.6% | 8.6% | Up approximately 1.0 point |
| Pre-tax income | $882 million | $756 million | 16.7% increase |
| Net income | $662 million | $556 million | 18.9% increase |
| Diluted EPS | $1.49 | $1.20 | 24.2% increase |
| Net margin | 5.5% | 4.8% | Improved |
For the six months ended June 30, 2019, operating revenue was $22.54 billion, operating income was $1.53 billion, pre-tax income was $1.13 billion, and net income was $847 million. Six-month net income increased from $716 million in the prior-year period, while adjusted pre-tax income excluding special items declined to $1.39 billion from $1.48 billion.
- Passenger revenue increased 3.2% in the quarter and 2.6% year to date, supported by stronger demand. Revenue passenger miles increased 3.1% in the quarter, and the passenger load factor improved 3.2 percentage points to 86.6%.
- Cargo revenue declined 15.4% in the quarter and 10.1% year to date, primarily due to lower international freight volumes.
- Fuel expense declined 5.1% in the quarter to $2.0 billion, reflecting a lower average fuel price. AAG had no fuel hedging contracts and remained fully exposed to fuel-price changes.
- Total operating expenses increased 1.6% in the quarter and 1.8% year to date. Salaries, maintenance, rent, depreciation and regional costs increased, partly offsetting lower fuel and special-item expense.
- Total CASM increased to 14.94 cents from 14.59 cents. CASM excluding special items and fuel increased 4.8% to 11.34 cents.
- Six-month operating cash flow was $2.39 billion, down from $2.89 billion. The decline primarily reflected $1.2 billion of pension contributions, compared with $311 million in the prior-year period.
- Six-month capital expenditures and aircraft purchase deposits were $2.32 billion, resulting in $2.41 billion of net cash used in investing activities.
Liquidity, Debt and Capital Allocation
- At June 30, 2019, AAG had $8.25 billion of available liquidity, consisting of $319 million of cash, $5.09 billion of short-term investments and $2.84 billion of undrawn revolving credit facilities. Restricted cash and short-term investments totaled $157 million.
- Total long-term debt, including current maturities, was $24.9 billion, including $3.4 billion due within one year. Significant near-term maturities included $750 million of senior notes due October 2019 and $500 million due March 2020.
- AAG issued $750 million of 5.0% senior notes due 2022, raised $650 million through spare-engine financing, completed aircraft financings and generated $167 million from aircraft sale-leasebacks during the quarter.
- AAG repurchased 16.7 million shares for $600 million during the first six months and had approximately $1.1 billion of remaining authorization under its current repurchase program. Quarterly dividends were $0.10 per share; a further $0.10 per share dividend was declared in July 2019.
- Collateral-related covenant tests were satisfied as of the latest applicable measurement dates. Debt agreements require maintenance of specified liquidity and collateral levels.
Material Changes Versus the Prior Comparable Period
- Profitability improved on a GAAP basis because of higher passenger revenue, lower fuel costs and lower special-item expense.
- Underlying cost performance weakened: year-to-date adjusted pre-tax income declined despite revenue growth, and CASM excluding special items and fuel rose 3.8%.
- Maintenance expense increased 16.7% year to date, partly because of a transition to flight-hour-based maintenance contracts and higher component repairs.
- The company made substantially larger pension contributions, reducing AAG operating cash flow, although American Airlines standalone operating cash flow increased because of lower intercompany cash transfers.
- AAG’s stockholders’ deficit improved from $169 million at December 31, 2018 to $22 million at June 30, 2019. Share count declined following repurchases, partly offset by the distribution of approximately 17.3 million shares from the bankruptcy disputed-claims reserve.
- AAG adopted ASU 2018-02 retrospectively and reclassified $622 million of stranded tax effects from accumulated other comprehensive loss to retained earnings.
Guidance, Outlook, Commentary and Risks
- The FAA grounding of the Boeing 737 MAX aircraft led to approximately 7,800 canceled flights in the quarter and reduced second-quarter pre-tax income by an estimated $175 million. Management estimated a full-year 2019 pre-tax impact of approximately $400 million, assuming cancellations through November 2, 2019.
- AAG had 24 737 MAX aircraft in its fleet and 76 on order. The filing states that future delivery timing could not be forecast at the filing date.
- Management cited labor-related operational disruptions, including an alleged mechanic and ground-worker slowdown. A temporary restraining order was granted, and the company was awaiting the result of its request for a permanent injunction.
- Major risks include economic and travel-demand weakness, fuel-price volatility, intense competition, labor disruption, pilot shortages, aircraft delivery delays, airport and air-traffic constraints, cybersecurity incidents, foreign exchange and geopolitical risk, Brexit-related uncertainty, and extensive regulatory and environmental requirements.
- Approximately $8.4 billion of planned aircraft and certain engine expenditures were expected for 2019 through 2023. Total contractual obligations were reported at $72.5 billion, including debt, interest, aircraft commitments, leases, regional capacity agreements and pension obligations.
- The company faces ongoing litigation and investigations, including appeals related to a $45 million passenger-capacity antitrust settlement, a merger-related antitrust lawsuit awaiting a court decision, and a Department of Justice investigation concerning United States Postal Service contracts. Potential impacts remain uncertain and could be material.
Important Facts for Investors to Verify
- Whether Boeing 737 MAX aircraft returned to service as projected and whether the estimated approximately $400 million full-year pre-tax impact changed.
- Whether passenger demand, load factors and revenue growth continued to offset higher labor, maintenance, regional and aircraft ownership costs.
- Cash generation after pension contributions, capital expenditures, debt maturities, aircraft commitments, dividends and share repurchases.
- Refinancing plans and liquidity coverage for the $3.4 billion of AAG current debt maturities, including the October 2019 and March 2020 senior notes.
- Progress and ultimate outcomes of labor litigation, antitrust proceedings and the DOJ investigation.
- Exposure to fuel prices, given the absence of fuel hedges; management estimated that a one-cent-per-gallon increase would increase annual 2019 fuel expense by approximately $45 million.
- Availability of financing for aircraft commitments beyond 2020 and compliance with liquidity, collateral and other debt covenants.