American Airlines Group Inc. annual report, FY2017

American Airlines Group Inc. 2017 Form 10-K Summary

Business context and reporting period

American Airlines Group Inc. (AAG), together with wholly owned subsidiaries including American Airlines, operates a major network airline serving passengers and cargo. The company operated nearly 6,700 daily flights to nearly 350 destinations in more than 50 countries and carried approximately 200 million passengers in 2017. The filing covers the fiscal year ended December 31, 2017, with comparative results for 2016 and 2015. American Airlines is AAG’s principal operating subsidiary; both entities are included in the filing.

At December 31, 2017, the company operated 948 mainline aircraft and was supported by 597 regional aircraft. Approximately 126,600 full-time equivalent employees were employed across the consolidated company, with approximately 85% represented by labor unions.

Financial performance and key metrics

Metric	2017	2016	Change
Total operating revenue	$42.207 billion	$40.180 billion	Up 5.0%
Operating expenses	$38.149 billion	$34.896 billion	Up 9.3%
Operating income	$4.058 billion	$5.284 billion	Down 23.2%
Operating margin	9.6%	13.2%	Down approximately 3.6 points
Pre-tax income	$3.084 billion	$4.299 billion	Down 28.3%
Net income	$1.919 billion	$2.676 billion	Down 28.3%
Diluted EPS	$3.90	$4.81	Down 18.9%
Net margin	4.5%	6.7%	Down approximately 2.2 points
Operating cash flow	$4.744 billion	$6.524 billion	Down $1.780 billion
Capital expenditures and aircraft deposits	$5.971 billion	$5.731 billion	Up $240 million

Passenger revenue increased 4.5% to $36.133 billion, supported by a 3.2% increase in consolidated yields and strong demand. Cargo revenue rose 14.3% to $800 million, while other revenue increased 7.6% to $5.274 billion, primarily from higher loyalty-program revenue.

Fuel expense increased 21.5% to $7.510 billion as the average fuel price rose 21.4% to $1.73 per gallon. Salaries, wages and benefits increased 8.5% to $11.816 billion and represented approximately 35% of operating expenses. Mainline CASM increased 8.6% to 12.96 cents; mainline CASM excluding special items and fuel increased 6.4% to 10.16 cents.

Total mainline and regional load factor was 81.9%, up 0.2 percentage points. Total revenue passenger miles increased 1.3%, available seat miles increased 1.1%, yield increased 3.2%, and total revenue per available seat mile increased 3.9% to 15.27 cents.

Balance sheet, debt and liquidity

Total assets were $51.396 billion, compared with $51.274 billion at December 31, 2016.
Long-term debt and capital leases, net of current maturities, were $22.511 billion; total debt and capital lease obligations before discounts and current maturities were approximately $25.301 billion.
Stockholders’ equity was $3.926 billion, compared with $3.785 billion in 2016.
Total available liquidity was approximately $7.566 billion, consisting of $295 million of cash, $4.771 billion of short-term investments and $2.500 billion of undrawn revolving credit facilities. Restricted cash and short-term investments totaled $318 million.
Debt agreements require AAG to maintain at least $2.0 billion of defined liquidity. Management reported compliance with applicable collateral coverage tests at year-end.
Variable-rate debt represented approximately 40% of total long-term debt. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $95 million, partially offset by approximately $51 million of additional interest income.

Material changes versus the prior comparable period

Revenue growth was more than offset by higher fuel costs, wage rates, maintenance costs and fleet-related depreciation, causing operating income to decline 23.2%.
Operating cash flow declined from $6.524 billion to $4.744 billion, principally because of lower profitability.
Capital spending remained elevated at $5.971 billion. The company invested approximately $4.1 billion in new aircraft, took delivery of 57 new mainline aircraft and retired 39 mainline aircraft.
Debt issuance totaled $3.058 billion, including $2.0 billion of enhanced equipment trust certificates and approximately $1.0 billion of other aircraft financing. Debt repayments totaled $2.332 billion.
AAG repurchased 33.9 million shares for $1.6 billion in 2017, compared with 119.8 million shares for $4.4 billion in 2016. It also paid $198 million of dividends, or $0.40 per share.
Special items totaled $749 million, including $273 million of merger integration costs, $232 million of fleet restructuring costs, $123 million of employee Tax Act bonus expense and $46 million of labor-contract expenses.
The fourth quarter included $307 million of AAG net special items and reported net income of $258 million, compared with $289 million in the fourth quarter of 2016.

Guidance, outlook, management commentary and unusual items

Management expects the 2017 Tax Cuts and Jobs Act to reduce the effective tax rate to approximately 24% beginning in 2018, compared with approximately 38% in 2017. The filing states that the company currently does not pay federal cash income taxes because of its net operating losses.
AAG had approximately $10.0 billion of federal NOL carryforwards and $3.4 billion of state NOL carryforwards at year-end 2017. The company expects substantially all to be available in 2018, subject to applicable limitations.
Management expected approximately $170 million of cash tax refunds in both 2019 and 2020 from the repeal of the corporate alternative minimum tax.
Management estimated a $45 million increase in 2018 annual fuel expense for each one-cent-per-gallon increase in fuel prices. The company had no fuel-hedging contracts outstanding and remained fully exposed to fuel-price changes.
Planned aircraft and certain engine expenditures were approximately $12.3 billion for 2018 through 2022. Total aircraft and engine purchase commitments were approximately $13.764 billion as of December 31, 2017, and financing was not yet in place for substantially all aircraft deliveries scheduled for 2019 and beyond.
Minimum pension contributions were expected to total approximately $467 million in 2018, including a $425 million supplemental contribution. Management expects pension funding obligations to increase materially beginning in 2019 after favorable temporary funding rules expired.
The company adopted new revenue-recognition and retirement-benefit presentation standards effective January 1, 2018. The expected retrospective recast would increase 2017 reported revenue to $42.622 billion, reduce reported net income to $1.282 billion and reduce stockholders’ equity to a deficit of $780 million, primarily because of the higher deferred-revenue liability for AAdvantage mileage credits. These are accounting presentation and measurement changes rather than a change in cash flow.

Principal risks and contingencies

Fuel-price volatility and the absence of fuel hedging could materially affect earnings and liquidity.
High leverage, aircraft-financing obligations, operating leases, pension liabilities and approximately $74.135 billion of total contractual obligations could constrain financial flexibility.
Competitive pricing, low-cost carriers, changing capacity, economic downturns, seasonality and international political or economic conditions may reduce demand or yields.
Approximately 85% of employees are union represented. Ongoing labor negotiations, future contract changes, wage increases, pilot shortages and potential operational disruptions could raise costs or reduce capacity.
Credit-card processors may impose cash holdbacks, potentially up to 100% of relevant advance ticket sales, if the company experiences specified adverse financial conditions.
The company faces DOJ investigations and approximately 100 private antitrust class-action lawsuits concerning alleged coordination of air passenger capacity, as well as a DOJ inquiry involving certain U.S. Postal Service contracts. Potential outcomes are uncertain and could be material.
A bankruptcy-related proceeding concerning retiree medical and other postretirement benefits remains unresolved; the financial statements do not reflect any potential modification or termination of those benefits.
Cybersecurity incidents, technology failures, airport or air-traffic-control disruptions, extreme weather, terrorism, environmental regulation and changes to international aviation agreements could adversely affect operations.

Most important facts for investors to verify

Whether revenue growth and yield improvements can offset continuing fuel, labor and fleet-investment cost inflation.
The sustainability of approximately $7.6 billion of available liquidity after aircraft purchases, debt service, pension contributions, dividends and share repurchases.
Aircraft-financing availability and the company’s ability to fund approximately $13.8 billion of aircraft and engine commitments.
The effect of the new revenue standard on AAdvantage liabilities, reported earnings, equity and future revenue recognition.
Progress and potential cash impact of labor negotiations, pension funding requirements and the unresolved retiree-benefit proceeding.
Developments in the DOJ investigations, private antitrust litigation and other legal contingencies.
Exposure to fuel and interest rates, including the disclosed sensitivity of $45 million per one-cent fuel-price increase and $95 million per 100-basis-point interest-rate increase.