American Airlines Group Inc. quarterly report, Q2 FY2014

American Airlines Group Inc. — 2014 Q2 Form 10-Q Summary

Business context and reporting period

Unaudited results cover the three and six months ended June 30, 2014. American Airlines Group Inc. (AAG) emerged from Chapter 11 and completed its merger with US Airways Group on December 9, 2013. Accordingly, 2014 consolidated results include American and US Airways, while reported 2013 AAG results generally exclude US Airways and are not directly comparable. Management provides combined 2013 AAG and US Airways results for more meaningful comparisons.

The combined company operated approximately 6,700 daily flights to 339 destinations in 54 countries, with 984 mainline aircraft and 557 regional aircraft at June 30, 2014.

Key financial metrics

Metric	Three months ended June 30, 2014	Six months ended June 30, 2014
Operating revenue	$11.355 billion	$21.351 billion
Operating income	$1.399 billion	$2.129 billion
Operating margin	12.3%	10.0%
Net income	$864 million	$1.343 billion
Net margin	7.6%	6.3%
Diluted earnings per share	$1.17	$1.82
Net cash from operating activities	Not separately provided	$2.637 billion

Second-quarter combined operating revenue increased 10.2% versus combined 2013 results, while operating income increased 41.2% to $1.399 billion and net income increased 70.4% to $864 million. Excluding special items, management reported second-quarter net income of approximately $1.5 billion, compared with $681 million for the combined 2013 period.

Mainline and regional passenger revenue was $9.920 billion, up 9.2% on a combined basis, driven by a 2.5% increase in revenue passenger miles and a 6.5% increase in yield.
Passenger revenue per available seat mile was 14.57 cents, up 5.9% from the combined 2013 period.
Total capacity increased 3.1%; the combined passenger load factor was 84.0%, down 0.5 percentage points.
Mainline cost per available seat mile excluding special items and fuel was 8.55 cents, up 2.2% from combined 2013.
Fuel expense was $3.4 billion, up 2.8% on a combined basis. Average fuel price was approximately $3.03 per gallon.

Liquidity, debt and capital resources

At June 30, 2014, AAG had $10.341 billion of cash, short-term investments and restricted cash, including $9.459 billion unrestricted and $882 million restricted.
AAG had $1.210 billion of cash and $8.249 billion of short-term investments. It also had a $1.0 billion undrawn revolving credit facility.
Long-term debt and capital lease obligations, including current maturities and before debt discount, totaled $16.795 billion for AAG and $10.637 billion for American.
Six-month capital expenditures and aircraft purchase deposits were $2.678 billion; debt and capital lease payments were $1.145 billion.
Operating cash flow exceeded investing and financing cash uses, producing a $70 million increase in cash during the first six months.
AAG’s contractual obligations totaled approximately $84.966 billion, including debt, interest, aircraft and engine commitments, leases, regional capacity purchase agreements, pension contributions and other obligations.

Material changes versus prior comparable periods

The merger materially expanded the consolidated business and makes reported GAAP comparisons difficult. On a combined basis, second-quarter revenue rose 10.2%, operating expenses rose 7.0%, operating income rose 41.2% and net income rose 70.4%.
Six-month operating revenue was $21.351 billion versus $12.547 billion reported for AAG in 2013; the comparison is distorted by the absence of US Airways in the 2013 AAG results. On the company’s adjusted comparison excluding the merger impact, revenue increased 8.6%.
Six-month operating cash flow increased by $767 million to $2.637 billion, principally because 2014 included US Airways.
Stockholders’ equity improved from a $2.731 billion deficit at December 31, 2013 to $4.086 billion of equity at June 30, 2014, largely reflecting post-emergence equity distributions and earnings.
Bankruptcy settlement obligations declined from $5.928 billion to $415 million as preferred stock converted and obligations were settled through equity distributions.
Fuel hedging ended: the company sold its remaining fuel hedge portfolio during the quarter and had no fuel hedges outstanding at June 30, 2014.

Special items, outlook and unusual items

Second-quarter AAG net special charges totaled $592 million, including $330 million of non-cash tax expense related to the sale of fuel hedges, $163 million of merger integration costs, bankruptcy-related charges and aircraft lease buyout costs.
Six-month net special charges totaled $515 million, including $365 million of merger integration expenses, partly offset by a $309 million gain on the divestiture of slots at Ronald Reagan Washington National Airport.
Management stated that strong travel demand and second-quarter performance provided a foundation for continued improvement, but did not provide specific quantitative full-year revenue or earnings guidance in the filing.
Management expected the operational integration of American and US Airways to take approximately 18 to 24 months from the merger date. Until a single FAA operating certificate is issued, the airlines continue to operate separately.
On July 23, 2014, the board authorized a $1.0 billion share repurchase program through December 31, 2015 and had declared a $0.10 per-share dividend payable August 18, 2014.
AAG announced the planned redemption on August 22, 2014 of the remaining $900 million principal amount of 7.50% senior secured notes at 103.75% of principal plus accrued interest.
The board authorized supplemental pension contributions of up to $600 million in 2014, in addition to the $120 million minimum contribution.

Risks and contingencies

The company is fully exposed to fuel-price changes because it has no outstanding fuel hedges and currently does not intend to hedge. Management estimated that a one-cent-per-gallon fuel increase would raise annual expense by approximately $43 million.
Approximately $791 million of unrestricted cash was held in Venezuelan bolivars. Repatriation timing and applicable exchange rates remain uncertain, and the company is evaluating potential impairment.
Merger integration, technology-system conversion, labor integration, FAA certification and realization of anticipated synergies could take longer or cost more than expected.
High leverage, fixed obligations, aircraft purchase commitments, pension obligations and financing covenants may constrain liquidity. Credit facilities require minimum aggregate liquidity of $2.0 billion; certain facilities also require specified controlled cash balances.
The company had approximately $19.4 billion of consolidated aircraft and engine purchase commitments for 2014 through 2018, and financing was not secured for certain aircraft on order.
Credit-card processors may impose cash holdbacks following specified adverse financial events, potentially reducing unrestricted liquidity.
Approximately 30.4 million shares remained in the disputed claims reserve at June 30, 2014; subsequent claim resolutions could affect future share distributions and recoveries.
Pending matters include private antitrust litigation, the Sabre antitrust action, unresolved bankruptcy claims and litigation concerning retiree benefits. Outcomes and financial effects remain uncertain.
Use of approximately $10.6 billion of federal NOLs and $4.7 billion of state NOLs is subject to Section 382 and other limitations; the filing states that the ability to use these attributes is not assured.
Other material risks include economic and travel-demand weakness, intense low-cost-carrier competition, weather and hub disruptions, labor disputes, regulatory changes, cybersecurity and technology failures, aircraft delivery delays, interest-rate changes and pension funding requirements.

Most important facts for investors to verify

Use combined AAG and US Airways data, rather than reported 2013 AAG GAAP results alone, when assessing year-over-year operating performance.
Reconcile reported net income with the $592 million of second-quarter special charges and evaluate recurring earnings separately.
Monitor integration costs, operating certificate timing, technology implementation and realization of merger synergies.
Assess liquidity after the planned $900 million debt redemption, potential pension contributions, aircraft commitments, dividends and share repurchases.
Track unrestricted cash held in Venezuela, repatriation developments and any related impairment charges.
Review fuel-price sensitivity following the termination of fuel hedging and the company’s stated policy not to hedge.
Monitor disputed bankruptcy claims, reserve-share distributions, pending litigation and the potential effect on liabilities and share count.
Verify the availability and limitations of NOLs, including Section 382 restrictions and expiration dates.