American Airlines Group Inc. — 2020 First-Quarter Form 10-Q
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 three months ended March 31, 2020. The quarter was materially affected by the COVID-19 pandemic, government travel restrictions and an unprecedented decline in air-travel demand, particularly during March.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total operating revenue | $8.515 billion | $10.584 billion | Down 19.6% |
| Passenger revenue | $7.681 billion | $9.658 billion | Down 20.5% |
| Operating income (loss) | $(2.549) billion | $375 million | Down $2.924 billion |
| Pre-tax income (loss) | $(2.890) billion | $245 million | Down $3.135 billion |
| Net income (loss) | $(2.241) billion | $185 million | Down $2.426 billion |
| Diluted EPS | $(5.26) | $0.41 | Unfavorable |
| Operating cash flow | $(168) million | $1.651 billion | Down $1.819 billion |
| Capital expenditures and aircraft deposits | $845 million | $1.305 billion | Down $460 million |
GAAP operating margin was approximately negative 29.9%, compared with approximately 3.5% in Q1 2019. Net margin was approximately negative 26.3%, compared with approximately 1.7% in the prior-year quarter. Pre-tax loss excluding net special items was $1.448 billion, compared with pre-tax income excluding special items of $314 million in Q1 2019.
- Revenue passenger miles declined 17.6%, available seat miles declined 6.9%, and passenger load factor fell 9.5 percentage points to 72.7%.
- Total revenue per available seat mile declined 13.6% to 13.71 cents.
- Total operating cost per available seat mile increased 16.3% to 17.82 cents. CASM excluding fuel and special items increased 9.2% to 12.97 cents.
- Fuel expense declined 19.2% to $1.395 billion, reflecting lower fuel prices and reduced consumption. Salaries, wages and benefits increased 1.6% to $3.140 billion.
- At March 31, 2020, AAG reported cash of $474 million, short-term investments of $3.102 billion and total available liquidity of approximately $6.8 billion, including $3.243 billion of undrawn revolving credit facilities.
- Long-term debt, including current maturities, was $24.7 billion. Current maturities were $3.4 billion. AAG stockholders’ deficit increased to $2.636 billion from $118 million at December 31, 2019.
- Air traffic and loyalty-program liabilities totaled $14.324 billion at March 31, 2020, up from $13.423 billion at year-end 2019.
Material changes versus the prior comparable period
- COVID-19 caused a sharp March demand collapse, producing a $2.069 billion decline in quarterly revenue while operating expenses increased $855 million, or 8.4%.
- Operating special items increased to $1.225 billion from $138 million. Significant Q1 2020 items included $744 million of fleet impairment, $218 million of labor-contract expenses, $205 million of severance expenses and $93 million of regional-aircraft impairment-related charges.
- The fleet impairment charge included approximately $676 million of non-cash aircraft and spare-parts write-downs and $68 million of right-of-use asset and lease-return charges. Management accelerated retirements of Boeing 757, Boeing 767, Airbus A330-300, Embraer 190 and certain regional aircraft.
- Nonoperating special items included $180 million of primarily unrealized losses related to the China Southern Airlines investment and treasury-rate-lock derivatives.
- Operating cash flow shifted from $1.651 billion provided in Q1 2019 to $168 million used in Q1 2020. Financing cash flow improved to $526 million provided, supported by $1.0 billion of delayed-draw term-loan borrowings and other debt financing.
- AAG repurchased 6.4 million shares for $145 million and paid a $43 million dividend during the quarter before suspending share repurchases and future dividends.
Guidance, outlook, commentary and risks
- Management expected April and May 2020 capacity to decline approximately 80% year over year and June capacity approximately 70%, subject to further demand-driven changes.
- Management estimated average Q2 cash burn of approximately $70 million per day, declining toward $50 million per day in June, assuming no material adverse unforecasted events.
- The company estimated that it had reduced 2020 operating and capital expenditures by more than $12 billion. Nearly 39,000 team members had elected early retirement, reduced schedules or partially paid leave.
- AAG and its subsidiaries were approved for approximately $5.8 billion of CARES Act Payroll Support Program assistance; $2.9 billion was received in April 2020. The program contemplated approximately $1.7 billion of Treasury promissory-note obligations and warrants for up to approximately 13.7 million AAG shares if the full assistance amount were received.
- AAG also applied for an approximately $4.75 billion Treasury secured loan, which had not been acted on as of the filing date and could involve warrants for approximately 38 million additional shares.
- CARES Act support restricts involuntary workforce actions and certain pay reductions through September 30, 2020, requires specified air service, prohibits share repurchases and dividends through September 30, 2021, and restricts certain executive compensation through March 24, 2022.
- Debt agreements include minimum liquidity requirements of at least $2.0 billion and collateral loan-to-value covenants. Management expected to meet obligations and remain compliant for the next 12 months based on projected cash flows, financing access and government assistance, but emphasized substantial uncertainty.
- Key risks include prolonged or renewed COVID-19 effects, continued negative cash flow, inability to obtain additional financing, high leverage, aircraft and engine purchase commitments, fuel-price volatility, labor costs, regional-carrier stress, Boeing 737 MAX delays, litigation, credit-card processor holdbacks and potential additional asset impairments.
Investor verification points
- Verify the pace of recovery in passenger demand, load factor, capacity, revenue per available seat mile and daily cash burn after March 31, 2020.
- Verify actual CARES Act funding received, associated Treasury debt and warrants, restrictions and the status of the proposed secured loan.
- Assess liquidity after the $2.7 billion of revolving-facility borrowings made in April 2020 and compare available liquidity with the $2.0 billion covenant threshold.
- Review debt maturities, aircraft purchase commitments, lease obligations and potential need for additional secured or unsecured financing.
- Monitor further fleet retirements, impairment charges, workforce actions and the carrying values of goodwill and indefinite-lived intangible assets.
- Evaluate exposure to ticket refunds, air-traffic-liability recognition timing, loyalty-program redemptions and potential credit-card processing holdbacks.