American Airlines Group Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG) and wholly owned subsidiary American Airlines, Inc. reported unaudited results for the three and six months ended June 30, 2020. The quarter was dominated by the COVID-19 pandemic, government travel restrictions and an unprecedented decline in air-travel demand.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total operating revenue | $1.622 billion | $11.960 billion | $10.137 billion | $22.544 billion |
| Operating income (loss) | $(2.486) billion | $1.153 billion | $(5.034) billion | $1.528 billion |
| Pre-tax income (loss) | $(2.659) billion | $882 million | $(5.549) billion | $1.128 billion |
| Net income (loss) | $(2.067) billion | $662 million | $(4.308) billion | $847 million |
| Diluted EPS | $(4.82) | $1.49 | $(10.08) | $1.88 |
| Operating cash flow | Not separately provided for Q2 | Not separately provided for Q2 | $(1.076) billion | $2.387 billion |
Q2 total revenue declined 86.4%, including a 89.9% decline in passenger revenue to $1.108 billion, a 41.0% decline in cargo revenue to $130 million and a 47.2% decline in other revenue to $384 million. The reported operating loss included a $1.672 billion operating special-item benefit, principally $2.019 billion of recognized Payroll Support Program assistance, partly offset by severance and other charges. Excluding net special items, Q2 pre-tax loss was $4.320 billion versus pre-tax income of $1.072 billion in the prior-year quarter.
Operating margin was approximately negative 153.2% in Q2 2020 versus positive 9.6% in Q2 2019. Total CASM increased to 24.05 cents from 14.94 cents, while CASM excluding special items and fuel increased to 32.04 cents from 11.34 cents, primarily because capacity fell faster than costs.
Operating statistics reflected the demand shock: revenue passenger miles declined 88.5%, available seat miles declined 76.4%, passenger load factor fell 44.3 percentage points to 42.3%, PRASM declined 57.4% to 6.48 cents and TRASM declined 42.6% to 9.50 cents.
Liquidity, debt and balance sheet
- At June 30, 2020, AAG reported $10.2 billion of total available liquidity, consisting of $9.8 billion of unrestricted cash and short-term investments and $400 million of undrawn revolving capacity.
- AAG reported $31.4 billion of long-term debt, including current maturities of $2.5 billion, versus $23.9 billion at December 31, 2019. The carrying value of total debt, including current maturities, was $30.7 billion and estimated fair value was $26.1 billion.
- Total assets were $64.5 billion and AAG stockholders’ deficit was $3.2 billion at June 30, 2020, compared with a $118 million deficit at year-end 2019.
- Six-month financing cash inflows included $9.464 billion of long-term debt issuance and $1.527 billion of equity issuance. Financing cash flow was $8.214 billion, while investing cash flow was negative $6.961 billion, principally due to purchases of short-term investments and capital expenditures.
- AAG issued $2.5 billion of 11.75% senior secured notes due 2025, $1.0 billion of 6.50% convertible senior notes due 2025, and $500 million of 3.75% senior notes due 2025. It also drew $2.8 billion under revolving facilities and issued approximately $360 million of JFK facility revenue bonds.
Material changes versus the prior comparable period
- COVID-19 caused a severe revenue contraction and converted profitable 2019 periods into substantial losses and negative operating cash flow.
- Capacity was reduced 76% year over year in Q2; management expected Q3 capacity to be approximately 60% below Q3 2019 levels.
- The company accelerated retirement of Boeing 757, Boeing 767, Airbus A330-300, Embraer 190 and certain regional aircraft, and recorded approximately $838 million of fleet impairment charges in the first six months.
- More than 41,000 team members elected early retirement, reduced schedules or partially paid leave. Management and support staffing declined by approximately 5,100 positions, or 30%.
- AAG issued 85.2 million common shares for net proceeds of approximately $1.1 billion and suspended future share repurchases and dividends. Six-month repurchases totaled $145 million and the company paid a $43 million dividend before the suspension.
- AAG received $5.2 billion of an expected $5.8 billion under the CARES Act Payroll Support Program. The program is expected to result in approximately $1.7 billion of promissory-note debt, warrants for approximately 13.7 million shares, and approximately $4.0 billion of other assistance recognized over Q2 and Q3.
Guidance, outlook, commentary and risks
- Management expected 2020 results to remain severely affected by COVID-19 and stated that the duration and severity of the demand decline could not be predicted.
- Management expected to meet cash obligations and remain compliant with debt covenants for the following 12 months based on current liquidity, anticipated financing and government assistance, and projected operating cash flows. This assessment is dependent on assumptions that may prove materially different.
- American signed a term sheet for an approximately $4.75 billion secured CARES Act loan, but definitive documentation, final terms and closing remained outstanding at the filing date.
- The company expected to defer approximately $300 million of employer Social Security taxes during 2020 and defer its 2020 minimum pension contribution, estimated at $196 million for AAG.
- On July 15, 2020, approximately 25,000 U.S.-based employees were notified of potential workforce reductions effective on or after October 1, subject to voluntary programs and other developments.
- Management announced plans to reduce summer 2021 long-haul international capacity by 25% versus 2019 and exit 19 international routes from six hubs. A proposed JetBlue strategic relationship and certain new routes were subject to governmental review.
- Key risks include prolonged or recurring pandemic impacts, additional travel restrictions, insufficient future financing, high leverage, collateral and liquidity covenants, possible credit-card processor holdbacks, fuel-price volatility, labor and pension obligations, aircraft delivery and Boeing 737 MAX uncertainties, regulatory and international risks, litigation, cybersecurity and potential additional asset impairments.
Most important facts for investors to verify
- Whether air-travel demand and load factors recover sufficiently to reduce continuing negative operating cash flow.
- The final terms, collateral requirements and closing status of the proposed $4.75 billion Treasury loan and other planned financings.
- Actual cash burn, unrestricted liquidity and compliance with the $2.0 billion minimum liquidity covenant.
- The amount and timing of additional workforce reductions, fleet retirements and related impairment or restructuring charges.
- The remaining CARES Act restrictions on dividends, share repurchases, executive compensation, employee actions and required air service.
- Whether future revenue recognition from the $14.1 billion loyalty-program and air-traffic liabilities differs materially from historical patterns.