American Airlines Group Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
This combined quarterly report covers American Airlines Group Inc. and its principal wholly owned subsidiary, American Airlines, Inc., for the three months ended March 31, 2017. The airline operated nearly 6,700 flights per day to approximately 350 destinations in more than 50 countries and carried approximately 46 million passengers during the quarter.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $9.624 billion | $9.435 billion | 2.0% increase |
| Operating income | $601 million | $1.335 billion | 55.0% decrease |
| Operating margin | 6.2% | 14.1% | Down 7.9 percentage points |
| Pre-tax income | $365 million | $1.117 billion | 67.4% decrease |
| Net income | $234 million | $700 million | 66.6% decrease |
| Net margin | 2.4% | 7.4% | Down 5.0 percentage points |
| Diluted EPS | $0.46 | $1.14 | 59.6% decrease |
| Operating cash flow | $2.250 billion | $2.620 billion | $370 million decrease |
| Capital expenditures and aircraft deposits | $1.714 billion | $1.557 billion | $157 million increase |
- Passenger revenue increased 0.8% to $8.155 billion. Other operating revenue increased 9.3% to $1.297 billion, primarily due to loyalty-program revenue and new co-branded credit-card agreements.
- Mainline and regional total revenue per available seat mile increased 3.1% to 14.96 cents. Consolidated passenger yield increased 2.4%, while the passenger load factor declined 0.4 percentage points to 79.2%.
- Total operating expenses increased 11.4% to $9.023 billion. Fuel and related taxes increased 37.8% to $1.720 billion, and salaries, wages and benefits increased 6.5% to $2.825 billion.
- Mainline CASM increased 13.7% to 13.17 cents. Mainline CASM excluding special items and fuel increased 8.9% to 10.48 cents.
- AAG reported $374 million of cash, $6.302 billion of short-term investments and $543 million of restricted cash and short-term investments at March 31, 2017.
- Total available liquidity was approximately $9.1 billion, consisting of $6.7 billion of unrestricted cash and investments and $2.425 billion of undrawn revolving credit facilities. Management stated that its current plan is to maintain minimum total available liquidity of $7.0 billion.
- Long-term debt and capital leases totaled $24.786 billion, including $1.714 billion of current maturities. American Airlines, Inc. reported $23.006 billion of long-term debt and capital leases.
- AAG returned $563 million to stockholders during the quarter, including $512 million of share repurchases and $51 million of dividends. The quarterly dividend was $0.10 per share.
Material changes versus the prior comparable period
- Revenue growth was modest and was more than offset by cost inflation. Fuel expense increased by $472 million, while salaries, wages and benefits increased by $173 million.
- The average fuel price increased approximately 40.4% to $1.70 per gallon, partially offset by a 1.8% decrease in fuel consumption. The company had no fuel-hedging contracts outstanding and remained fully exposed to fuel-price movements.
- Pre-tax income excluding special items decreased 60.0%, from $1.221 billion to $491 million.
- Operating special items increased to $121 million from $104 million. Mainline special items included $63 million of merger-integration expenses, $63 million of fleet-restructuring expenses, an $18 million credit from bankruptcy-obligation mark-to-market adjustments and $11 million of other operating charges.
- Operating cash flow declined despite higher revenue, primarily because of lower profitability. Capital spending increased and focused principally on fleet renewal, including 22 aircraft delivered or financed during the period.
- The company issued approximately $744 million of EETC equipment notes and $155 million of other equipment notes, while repaying $686 million of debt. It also refinanced a $1.8 billion term loan and reduced the applicable LIBOR margin.
- After the quarter, management offered mid-contract hourly base-pay adjustments averaging approximately 5% for flight attendants and 8% for pilots. The estimated salary and benefit expense impact was approximately $230 million in 2017 and $350 million in each of 2018 and 2019.
Guidance, outlook, management commentary, risks and unusual items
- The filing does not provide a clear formal full-year earnings or revenue guidance figure. Management emphasized maintaining at least $7.0 billion of total available liquidity and continuing fleet renewal.
- Management attributed the earnings decline primarily to higher fuel costs and labor costs. It also noted improving yields but continuing competitive capacity pressure in certain domestic and international markets.
- Fuel exposure is significant: based on forecast consumption of approximately 4.3 billion gallons, each one-cent-per-gallon increase in fuel prices would increase annual expense by approximately $43 million.
- Interest-rate exposure is also material. A 100-basis-point increase would increase annual variable-rate debt expense by approximately $96 million, partly offset by approximately $69 million of additional interest income on short-term investments.
- The company had approximately $16.8 billion of aircraft and engine purchase commitments and approximately $76.1 billion of consolidated contractual obligations, including debt, interest, aircraft commitments, leases, regional capacity commitments and benefit obligations.
- American expects to adopt the revenue-recognition standard effective January 1, 2018, using the full retrospective method. Management expects a material increase in the loyalty-program liability and reclassification of certain ancillary fees into passenger revenue, although the ultimate financial-statement impact remained under evaluation.
- The company expects the new lease standard to materially increase recognized right-of-use assets and lease liabilities, principally for operating leases.
- Material contingencies include a Department of Justice investigation and approximately 100 putative class-action lawsuits concerning alleged coordination of airline capacity, a DOJ inquiry regarding certain U.S. Postal Service contracts, unresolved retiree-benefit litigation and remaining disputed Chapter 11 claims. The ultimate financial impact is uncertain and could be material.
- The filing identifies substantial risks from fuel-price volatility, high leverage, aircraft-financing needs, labor costs and potential disruptions, pilot shortages, competition, economic downturns, regulatory developments, foreign-exchange movements, cybersecurity and operational interruptions.
Most important facts for investors to verify
- Whether revenue and yield improvement can offset higher fuel, labor, maintenance and fleet-related costs.
- The sustainability of approximately $9.1 billion of available liquidity relative to $24.8 billion of debt and substantial aircraft, lease and benefit obligations.
- The effect of future labor-pay adjustments and additional collective-bargaining developments on unit costs and cash flow.
- The timing and balance-sheet impact of the 2018 revenue-recognition and future lease-accounting adoptions, particularly for the loyalty-program liability.
- Progress and potential exposure from the DOJ investigations, capacity-related antitrust litigation, retiree-benefit proceedings and other legal contingencies.
- Availability and cost of financing for the 277 aircraft on order and related engine commitments, particularly because many future aircraft deliveries were not yet financed.
- The revised aircraft-delivery schedules, including the deferral of A350 deliveries and other post-quarter changes to Boeing and Airbus commitments.