Business Context and Reporting Period
American Airlines Group Inc. (AAG), together with wholly owned American Airlines, Inc., filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The filing covers the post-December 2013 merger of AMR and US Airways Group. AAG operated nearly 6,700 daily flights to approximately 350 destinations, with 963 mainline and 578 regional aircraft at quarter-end.
During the quarter, American and US Airways received a single FAA operating certificate. Management stated that the reservations-system integration was targeted for October 2015, representing the final major customer-facing integration milestone.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Total operating revenue | $10.827 billion | $11.355 billion | $20.654 billion | $21.351 billion |
| Operating income | $1.921 billion | $1.399 billion | $3.137 billion | $2.129 billion |
| Operating margin | 17.7% | 12.3% | 15.2% | 10.0% |
| Net income | $1.704 billion | $864 million | $2.636 billion | $1.343 billion |
| Net margin | 15.7% | 7.6% | 12.8% | 6.3% |
| Diluted EPS | $2.41 | $1.17 | $3.70 | $1.82 |
| Net cash from operating activities | Not separately provided | Not separately provided | $4.841 billion | $2.637 billion |
Second-quarter passenger revenue declined 5.1% to $9.414 billion. Mainline passenger revenue fell 6.8%, while regional passenger revenue increased 3.1%. Cargo revenue declined 12.3% to $194 million.
Fuel expense fell 37.3% in the quarter and 40.1% in the first six months, primarily because average fuel prices declined. Mainline and regional fuel expense was $2.123 billion in the quarter, with an average price of $1.90 per gallon versus $3.03 in the prior-year quarter.
Mainline CASM excluding special items and fuel increased 2.5% to 8.77 cents in the quarter and 4.1% to 9.11 cents for the six-month period, primarily because of higher labor costs under new merger-related collective bargaining agreements.
Liquidity, Debt, and Capital Allocation
- At June 30, 2015, AAG held $9.666 billion of cash, short-term investments, and restricted cash, including $747 million restricted. Unrestricted cash and short-term investments were $8.919 billion.
- AAG reported $1.8 billion of available capacity under undrawn revolving credit facilities.
- Long-term debt and capital leases totaled $18.839 billion before debt discount, including $1.642 billion of current maturities. American separately reported $11.796 billion before debt discount.
- Six-month capital expenditures and aircraft purchase deposits were $3.139 billion. The company purchased $1.657 billion net of short-term investments and issued approximately $2.0 billion of debt.
- AAG repurchased 21.1 million shares for $943 million during the first six months and paid $140 million of dividends, or $0.20 per share.
- AAG refinanced its $1.9 billion and $750 million term loan facilities, extending maturities and reducing applicable LIBOR margins. AAG also issued $500 million of 4.625% senior notes due 2020.
Material Changes Versus the Prior Comparable Period
- Second-quarter operating income increased 37.3% to $1.921 billion, while net income increased 97.4% to $1.704 billion.
- Six-month operating income increased 47.3% and net income increased 96.3%, despite a 3.3% decline in operating revenue.
- Lower fuel prices were the primary earnings driver, while lower passenger yields, foreign-currency weakness, and competitive capacity growth pressured revenue.
- Mainline passenger PRASM declined 8.2% in the quarter and 5.3% for the six-month period. Combined mainline and regional PRASM declined 6.9% in the quarter and 4.4% for the six-month period.
- Second-quarter net special charges declined to $150 million from $592 million. Six-month net special charges increased to $462 million from $515 million, largely because of merger integration costs and pilot-contract costs.
- Operating cash flow increased by $2.204 billion to $4.841 billion for the six-month period, principally because of lower fuel costs.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear formal earnings or revenue guidance range. Management emphasized continued merger integration, fleet renewal, cost control, and the planned October 2015 reservations-system migration.
- AAG had no fuel hedges outstanding at June 30, 2015 and stated that its policy was generally not to hedge fuel consumption. Based on forecast 2015 consumption of approximately 4.3 billion gallons, a one-cent-per-gallon fuel increase would raise annual expense by approximately $43 million.
- Fuel-price savings were partly offset by higher labor costs. The ratified pilot agreement was expected to increase 2015 pilot compensation and benefits costs by approximately $650 million, including a $99 million special charge recognized in the first six months.
- AAG had approximately $629 million of unrestricted cash and short-term investments held in Venezuelan bolivars. Delays in repatriation, devaluation, or further Venezuelan currency restrictions could result in material losses.
- The company had approximately $22.5 billion of American aircraft and engine purchase commitments and $2.5 billion of US Airways-related commitments. Financing was not yet arranged for numerous aircraft on order.
- Minimum pension contributions were not expected until 2019 under then-current assumptions, but funding obligations could increase materially after favorable rules expire at the end of 2017.
- AAG received a June 2015 DOJ Civil Investigative Demand concerning possible illegal agreements or coordination of air passenger capacity and was named in related putative class actions. The filing states that these matters are in early stages and that potential financial impacts are uncertain.
- Other material contingencies include unresolved bankruptcy claims, retiree medical and other post-employment benefit litigation and grievances involving approximately $212 million, antitrust litigation related to the merger, and the pending Sabre antitrust matter.
- AAG’s credit facilities generally require minimum aggregate liquidity of at least $2.0 billion and contain restrictions on dividends, investments, additional debt, liens, and other actions.
Most Important Facts for Investors to Verify
- Whether lower fuel prices persist and how earnings respond to the company’s unhedged fuel exposure.
- Progress, cost, and operational effects of the October 2015 reservations-system integration.
- Passenger yield, PRASM, capacity growth, and competitive pricing trends, particularly in international markets.
- Debt maturities, refinancing needs, aircraft financing availability, and compliance with liquidity and collateral covenants.
- Potential exposure from Venezuelan bolivar balances and foreign-currency losses.
- Developments in the DOJ capacity investigation, related class actions, merger litigation, OPEB disputes, and bankruptcy claims reconciliation.
- The sustainability of share repurchases and dividends given aircraft commitments, fixed obligations, and merger-related cash needs.