American Airlines Group Inc. — 2022 Q3 Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG), together with wholly owned American Airlines, Inc., filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. Results reflect a substantial recovery in air-travel demand as COVID-19 restrictions eased, partially offset by elevated fuel prices, inflation, staffing constraints and ongoing industry volatility.
Key financial metrics
| Metric | Three months ended September 30, 2022 | Three months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 |
|---|---|---|---|---|
| Total operating revenue | $13.462 billion | $8.969 billion | $35.783 billion | $20.455 billion |
| Passenger revenue | $12.396 billion | $7.957 billion | $32.438 billion | $17.682 billion |
| Operating income (loss) | $930 million | $595 million | $225 million | $(279) million |
| Pre-tax income (loss) | $658 million | $206 million | $(824) million | $(1.357) billion |
| Net income (loss) | $483 million | $169 million | $(676) million | $(1.061) billion |
| Diluted EPS | $0.69 | $0.25 | $(1.04) | $(1.65) |
| Operating margin | 6.9% | 6.6% | 0.6% | (1.4)% |
| Net margin | 3.6% | 1.9% | (1.9)% | (5.2)% |
Third-quarter passenger revenue increased 55.8%, driven by a 21.7% increase in revenue passenger miles and a 28.0% increase in passenger yield. Passenger load factor rose to 85.3% from 78.7%. Total revenue per available seat mile increased to 19.63 cents from 14.68 cents.
Fuel expense increased 97.1% to $3.847 billion in the quarter. The average fuel price, including related taxes, rose to $3.73 per gallon from $2.07, while fuel consumption increased 9.5%. Total operating cost per available seat mile increased to 18.28 cents from 13.70 cents. CASM excluding fuel and net special items increased 3.0% to 12.61 cents.
For the first nine months, AAG generated $2.331 billion of operating cash flow, compared with $1.904 billion in the prior-year period. Capital expenditures were $1.860 billion, primarily for aircraft, spare engines and airport projects. Net cash used in financing activities was $1.347 billion, including $2.038 billion of debt and finance-lease repayments, partly offset by $699 million of aircraft-financing proceeds.
At September 30, 2022, AAG had $332 million of cash, $10.900 billion of short-term investments and $953 million of restricted cash and short-term investments. Total available liquidity was $14.295 billion, including $3.063 billion of undrawn revolving and other facilities.
Long-term debt was $36.559 billion before discounts and issuance costs, including $2.560 billion of current maturities. Total stockholders’ deficit was $7.893 billion. Air traffic and loyalty-program liabilities totaled $17.308 billion, including $8.161 billion of air traffic liability and $9.147 billion of loyalty liability.
Material changes versus the prior comparable period
- Third-quarter revenue increased 50.1%, while operating income increased $335 million to $930 million.
- Third-quarter net income increased $314 million to $483 million, despite substantially higher fuel and operating costs.
- The third quarter of 2021 included a $1.057 billion operating special credit, principally from Payroll Support Program financial assistance. Third-quarter 2022 included $39 million of operating special charges, including a $37 million litigation reserve adjustment.
- For the first nine months, revenue increased 74.9% and the operating result improved from a $279 million loss to $225 million of income. The company nevertheless reported a $676 million net loss.
- Fuel expense increased $5.773 billion for the first nine months, while salaries, wages and benefits increased $1.162 billion and regional expenses increased $1.150 billion.
- Available liquidity declined from $15.842 billion at December 31, 2021 to $14.295 billion at September 30, 2022, primarily reflecting debt repayment and capital spending.
- Debt decreased from $37.781 billion at December 31, 2021 to $36.559 billion at September 30, 2022. AAG repurchased $349 million of unsecured notes during the first nine months.
Guidance, outlook, management commentary, risks and unusual items
Management stated that it would continue matching forward capacity with booking trends and adjusting schedules as necessary. Based on current assumptions, management expected to meet cash obligations and remain in compliance with debt covenants for the next 12 months. The filing does not provide a formal full-year earnings or revenue guidance range.
Management highlighted continued recovery in domestic, Atlantic and Latin American travel demand, but noted that COVID-19 developments, economic conditions and future travel demand remain uncertain. The company had no fuel-hedging contracts outstanding and therefore remained fully exposed to fuel-price volatility. A one-cent-per-gallon increase in fuel prices was estimated to increase 2022 annual fuel expense by approximately $40 million.
Material unusual items included a $149 million non-cash fleet impairment charge for retired Airbus A330 aircraft and a $37 million litigation reserve adjustment during the first nine months. Prior-year results benefited from $4.435 billion of operating special credits, principally related to government payroll-support assistance.
The Department of Justice and multiple states were pursuing an antitrust action concerning the Northeast Alliance with JetBlue; a bench trial began September 27, 2022. The company also disclosed appeals in other antitrust litigation and cautioned that legal outcomes and potential financial effects could be material.
Key risks include high leverage and debt covenants, variable-rate debt and the transition from LIBOR, fuel-price volatility, pilot and labor shortages, regional-carrier and supplier disruption, aircraft-delivery delays, operational reliability, cybersecurity, regulatory and antitrust proceedings, economic recession, renewed COVID-19 impacts, foreign-exchange exposure and climate-related regulation. AAG had $10.5 billion of borrowings linked to LIBOR at September 30, 2022.
Most important facts for investors to verify
- Whether the post-pandemic revenue recovery can offset fuel, labor, maintenance and other inflationary costs.
- Whether positive operating cash flow and $14.3 billion of available liquidity remain sufficient to fund debt maturities, aircraft commitments and other contractual obligations.
- The company’s ability to reduce its stockholders’ deficit and return to sustainable GAAP profitability.
- Compliance with the $2.0 billion minimum unrestricted-liquidity covenant and other loan-to-value, collateral and debt-service covenants.
- Potential outcomes and financial effects of the DOJ antitrust case involving the Northeast Alliance with JetBlue.
- Exposure to unhedged fuel prices, higher interest rates and the replacement of LIBOR on $10.5 billion of borrowings.
- Funding needs for approximately $12.8 billion of aircraft and engine purchase commitments shown in the contractual-obligations table, as well as other lease, debt and regional-capacity obligations.
- Whether pilot shortages, staffing constraints, aircraft-delivery delays and third-party regional-carrier issues limit planned capacity and operational reliability.