American Airlines Group Inc. — First-Quarter 2016 Form 10-Q
Business context and reporting period
Combined quarterly report for American Airlines Group Inc. (AAG) and wholly owned subsidiary American Airlines, Inc. for the three months ended March 31, 2016. American and US Airways were merged for legal and internal-structure purposes on December 30, 2015; historical financial information is presented as if the entities had been under common control since December 9, 2013.
American and American Eagle operated nearly 6,700 daily flights to approximately 350 destinations in more than 50 countries. Approximately 47 million passengers boarded mainline and regional flights during the quarter. AAG operated 942 mainline aircraft and had 597 regional aircraft in operation at March 31, 2016.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total operating revenue | $9.435 billion | $9.827 billion | Down 4.0% |
| Operating income | $1.335 billion | $1.216 billion | Up 9.8% |
| Operating margin | 14.1% | 12.4% | Up approximately 1.7 points |
| Pre-tax income | $1.117 billion | $943 million | Up 18.5% |
| Income tax provision | $417 million | $11 million | Significantly higher |
| Net income | $700 million | $932 million | Down 24.9% |
| Net margin | 7.4% | 9.5% | Down approximately 2.1 points |
| Diluted EPS | $1.14 | $1.30 | Down 12.3% |
| Operating cash flow | $2.620 billion | $2.494 billion | Up $126 million |
| Capital expenditures and aircraft deposits | $1.557 billion | $1.409 billion | Up $148 million |
Passenger revenue declined 4.2% to $8.087 billion. Mainline passenger revenue fell 6.1% to $6.564 billion, while regional passenger revenue increased 4.9% to $1.523 billion. Cargo revenue declined 16.8% to $162 million.
Fuel expense declined 33.3% to $1.029 billion, reflecting a 34.0% decrease in the average fuel price to approximately $1.21 per gallon. Salaries, wages and benefits increased 11.8% to $2.652 billion, primarily due to new labor contracts and an employee profit-sharing program. Total operating expenses declined 5.9% to $8.100 billion.
Mainline and regional passenger revenue per available seat mile declined 7.5% to 12.43 cents. Mainline CASM excluding special items and fuel increased 1.4% to 9.62 cents. Passenger load factor was 79.6%, compared with 79.9% in the prior-year quarter.
Liquidity, debt and capital allocation
- At March 31, 2016, AAG had $495 million of cash, $6.435 billion of short-term investments and $2.425 billion of undrawn revolving credit capacity, for total available liquidity of approximately $9.355 billion. Restricted cash and short-term investments totaled $691 million.
- Long-term debt and capital leases totaled $21.999 billion before discounts and issuance costs, including $2.610 billion of current maturities. American reported $20.246 billion of long-term debt and capital leases before discounts and issuance costs.
- AAG issued approximately $1.1 billion of aircraft enhanced equipment trust certificates and borrowed $426 million under aircraft financing agreements during the quarter.
- AAG repurchased 39.3 million shares for approximately $1.6 billion and paid $61 million of dividends, or $0.10 per share.
- Management expected approximately $3.2 billion of additional capital expenditures during the remainder of 2016 and $4.6 billion in 2017 for fleet renewal.
- Aircraft and engine purchase commitments totaled approximately $21.1 billion, including $3.226 billion due during the remainder of 2016 and $4.578 billion due in 2017.
Material changes versus the prior comparable period
- Revenue weakened despite a 3.6% increase in total available seat miles, primarily because passenger yield declined 7.1%. Management cited competitive capacity growth, lower fuel surcharges, foreign-currency weakness and economic softness in Latin America.
- Lower fuel prices produced substantial cost savings and increased reported operating income, but the benefit was partly offset by lower yields, higher labor costs and higher interest expense.
- Pre-tax income excluding special items was $1.221 billion, compared with $1.245 billion in Q1 2015, indicating broadly flat underlying pre-tax performance.
- Special operating charges declined to $104 million from $310 million, principally reflecting lower merger-integration costs.
- Net income declined despite higher pre-tax income because the company began recording an approximately 38% effective tax rate after reversing most of its deferred-tax-asset valuation allowance in 2015. The resulting tax expense was substantially non-cash because federal NOLs offset cash taxes.
- Weighted-average diluted shares declined to 611.5 million from 716.9 million, primarily reflecting share repurchases, which partially supported diluted EPS.
Guidance, outlook, commentary and unusual items
The filing does not provide a clear formal revenue or earnings outlook. Management emphasized continued fleet renewal, active cost management and the importance of maintaining approximately $9.4 billion of available liquidity in light of aircraft commitments and other fixed obligations.
AAG had no fuel-hedging contracts outstanding at March 31, 2016 and therefore remained fully exposed to fuel-price changes. Management estimated that a one-cent-per-gallon increase in aviation fuel prices would increase annual expense by approximately $44 million based on forecast consumption.
Management reported no minimum required pension contributions until 2018 under temporary funding rules, but expected pension funding obligations to increase materially after those rules expire. The company also disclosed substantial aircraft, lease, debt, regional-capacity and pension commitments.
Material legal matters included a DOJ investigation and approximately 100 putative class-action lawsuits concerning alleged coordination of passenger capacity, a DOJ investigation related to certain U.S. Postal Service contracts, and a pending proceeding involving retiree postemployment benefits. The ultimate financial impact of these matters was described as uncertain and potentially material.
In April 2016, subsequent to quarter-end, the board authorized a new $2.0 billion share-repurchase program and declared an additional $0.10-per-share dividend.
Most important facts for investors to verify
- Whether continued competitive capacity growth and lower yields offset the benefit of low fuel prices in subsequent quarters.
- The sustainability of reported profitability excluding special items and the effect of higher labor and interest costs.
- Future cash taxes as NOLs are consumed, including the availability and limitations of federal and state NOL carryforwards.
- Liquidity compliance under financing covenants, including the required minimum liquidity balance and potential credit-card processor holdbacks.
- Financing availability for aircraft deliveries, particularly the aircraft without committed financing through 2017 and beyond.
- The effect of substantial debt, lease, aircraft purchase, regional-capacity and pension obligations on future free cash flow.
- Progress and remaining costs of integrating American and US Airways, including labor, technology and operational integration.
- Developments and potential exposure related to the DOJ investigations, antitrust lawsuits and retiree-benefit litigation.
- Exposure to unhedged fuel prices, foreign-currency movements, economic weakness, airline competition and regional-carrier disruptions.