American Airlines Group Inc. — 2018 Q3 Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG), together with wholly owned American Airlines, Inc., operates a global network serving nearly 350 destinations in more than 50 countries, with approximately 6,700 daily flights and 53 million passengers in the third quarter. The unaudited filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total operating revenue | $11.56 billion | $10.97 billion | $33.60 billion | $32.01 billion |
| Operating income | $649 million | $1.26 billion | $2.11 billion | $3.59 billion |
| Pre-tax income | $456 million | $1.06 billion | $1.50 billion | $2.99 billion |
| Net income | $341 million | $661 million | $1.09 billion | $1.87 billion |
| Diluted EPS | $0.74 | $1.36 | $2.34 | $3.76 |
| Operating margin | 5.6% | 11.5% | 6.3% | 11.2% |
| Net margin | 3.0% | 6.0% | 3.3% | 5.8% |
Passenger revenue increased 4.6% to $10.56 billion in Q3, supported by a 2.3% increase in revenue passenger miles and a 2.2% increase in passenger yield. Cargo revenue rose 16.4% to $260 million, while other revenue increased 14.5% to $738 million, including $613 million from loyalty program marketing services.
Fuel was the principal cost pressure. Mainline and regional fuel expense increased 42.6% to $2.74 billion in Q3, while the average fuel price increased 37.6% to $2.30 per gallon. Total operating expenses rose 12.4%, outpacing the 5.4% revenue increase. Total CASM increased 9.4% to 14.54 cents, while CASM excluding special items and fuel increased 0.8% to 10.60 cents. TRASM increased 2.6% to 15.40 cents.
For the first nine months, operating cash flow was $2.80 billion versus $4.31 billion in 2017. Capital expenditures and aircraft purchase deposits were $2.74 billion, and net cash used in investing activities was $1.58 billion. Financing activities used $1.31 billion, including $2.44 billion of debt and capital lease repayments, $837 million of share repurchases and $140 million of dividends. Cash and restricted cash ended at $314 million.
Liquidity, debt and balance sheet
- Total available liquidity was approximately $7.4 billion, consisting of $303 million of cash, $4.55 billion of short-term investments and $2.5 billion of undrawn revolving credit facilities. Restricted cash and short-term investments were $154 million.
- AAG had $25.0 billion of long-term debt and capital lease obligations, including $2.5 billion of current maturities. American had $23.7 billion, including $2.5 billion of current maturities.
- Total assets were $52.6 billion and AAG reported a stockholders’ deficit of $568 million, compared with a $780 million deficit at December 31, 2017.
- AAG completed approximately $1.8 billion of incremental financing transactions in Q3, including aircraft and pre-delivery deposit financing, sale-leaseback proceeds and $500 million of incremental term loans.
- Credit ratings at September 30, 2018 were S&P BB-, Fitch BB- and Moody’s Ba3 for AAG.
Material changes versus the prior comparable period
- Revenue increased, but profitability declined materially because fuel costs rose faster than revenue. Q3 operating income decreased 48.4% and net income decreased 48.4% year over year.
- Excluding pre-tax special items, Q3 pre-tax income was $688 million versus $1.17 billion in 2017; nine-month pre-tax income excluding special items was $2.16 billion versus $3.43 billion.
- Hurricane Florence caused approximately 2,100 flight cancellations in September and reduced Q3 pre-tax income by an estimated $50 million.
- Q3 operating special items increased to $217 million from $107 million, primarily reflecting fleet restructuring, merger integration and severance costs. Nine-month operating special items were $564 million versus $431 million.
- The company repurchased 16.6 million shares for $800 million during the first nine months and had $1.7 billion remaining under its $2.0 billion authorization.
- AAG adopted the new revenue standard retrospectively. The change increased the value of loyalty program liabilities and shifted certain ancillary revenue classifications; it did not represent an equivalent change in underlying cash economics.
Guidance, outlook, commentary and risks
The filing does not provide a clear formal earnings or revenue guidance range. Management reported continued strong demand, higher fares and the eighth consecutive quarter of positive TRASM growth, but emphasized that higher fuel prices could not be fully offset by revenue gains.
- AAG had no fuel hedging contracts outstanding and stated that it remains fully exposed to fuel-price changes. A one-cent-per-gallon increase was estimated to raise annual fuel expense by approximately $45 million based on 2018 forecast consumption.
- Management expects adoption of the new lease standard on January 1, 2019 to materially increase reported assets and liabilities, principally through recognition of operating lease right-of-use assets and lease liabilities.
- The company had commitments for 275 aircraft and approximately $14.5 billion of aircraft and engine purchases. Aggregate AAG contractual obligations were $76.1 billion, including debt, interest, aircraft purchases, leases, regional capacity agreements and pension obligations.
- Management identified significant exposure to fuel prices, economic cycles, competition, foreign currency, interest rates, aircraft financing, pension funding, labor relations, regional carrier capacity, weather and natural disasters, cybersecurity, regulation and technology integration.
- Legal matters include a preliminary $45 million settlement of U.S. passenger-capacity antitrust litigation, ongoing DOJ investigations, and merger-related antitrust litigation for which a trial was expected to be scheduled.
- AAG had approximately 24.5 million shares remaining in a disputed claims reserve related to its Chapter 11 reorganization; future distributions could affect the share count.
Most important facts for investors to verify
- Whether revenue growth and pricing power can continue to offset fuel inflation and other cost increases.
- The company’s ability to fund approximately $8.4 billion of planned aircraft and engine expenditures for 2018–2022 while servicing substantial debt, lease and pension obligations.
- The effect of the January 1, 2019 lease-standard adoption on leverage, assets, liabilities and covenant calculations.
- Actual cash generation after capital expenditures, debt repayments, dividends and share repurchases, given the decline in operating cash flow.
- Progress and final resolution of antitrust investigations and litigation, including the $45 million proposed settlement.
- Exposure to unhedged fuel prices, variable-rate debt and foreign currency movements.
- Changes in loyalty program assumptions, including redemption behavior and estimated mileage-credit values, which affect deferred revenue and liabilities.