American Airlines Group Inc. 2015 Form 10-K Summary
Business context and reporting period
American Airlines Group Inc. (AAG) filed a combined Form 10-K with wholly owned subsidiary American Airlines, Inc. for the fiscal year ended December 31, 2015. AAG operates a global network airline through American, wholly owned regional carriers and third-party American Eagle carriers. The company operated nearly 6,700 daily flights to nearly 350 destinations in more than 50 countries and carried approximately 201 million passengers in 2015.
On December 30, 2015, US Airways Group merged into AAG and US Airways merged into American as part of post-merger integration. AAG’s 2015 and 2014 results include US Airways Group for the full periods, while 2013 includes US Airways Group only after the December 9, 2013 merger; therefore, 2013 comparisons are not directly comparable.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenues | $40.99 billion | $42.65 billion | (3.9%) |
| Operating expenses | $34.79 billion | $38.40 billion | (9.4%) |
| Operating income | $6.20 billion | $4.25 billion | 46.0% |
| Operating margin | 15.1% | 10.0% | Up approximately 5.1 points |
| Net income | $7.61 billion | $2.88 billion | Up $4.73 billion |
| Diluted EPS | $11.07 | $3.93 | Up $7.14 |
| Net cash from operating activities | $6.25 billion | $3.08 billion | Up $3.17 billion |
Adjusted for special items, operating income was $7.28 billion versus $5.07 billion in 2014, and adjusted net income was $6.27 billion versus $4.18 billion. Adjusted operating margin was approximately 17.8%.
- Mainline and regional passenger revenue declined 4.3% to $35.51 billion. Passenger yield fell 6.5%, while total passenger volume increased 2.0% and the load factor improved by 1.0 point to 83.0%.
- Mainline passenger revenue declined 5.7% to $29.04 billion, while regional passenger revenue increased 2.4% to $6.48 billion. Cargo revenue decreased 13.1% to $760 million.
- Fuel and related taxes declined 40.8% to $7.46 billion, reflecting a 40.7% decrease in average fuel price to $1.72 per gallon. Fuel represented approximately 21.6% of mainline operating expenses versus 33.2% in 2014.
- Salaries, wages and benefits increased 11.9% to $9.52 billion, primarily due to higher pay under new merger-related labor agreements.
- Mainline CASM declined 10.4% to 12.03 cents, but mainline CASM excluding special items and fuel increased 4.2% to 8.99 cents.
- Customer operating statistics improved in on-time performance to 80.1% from 77.9%, while the completion factor remained 98.4%. DOT customer complaints increased to 3.22 per 100,000 enplanements from 2.12.
Cash flow, capital allocation, debt and liquidity
- Operating cash flow was $6.25 billion. Capital expenditures and aircraft purchase deposits were $6.15 billion, producing negative operating cash flow after capital investment of approximately $98 million before financing and other investing items.
- AAG ended 2015 with $6.95 billion of cash, short-term investments and restricted cash, including $695 million restricted. Cash and short-term investments excluding restricted amounts were $6.25 billion, down from $7.30 billion in 2014.
- Available liquidity, including undrawn revolving credit facilities, was approximately $8.7 billion. Undrawn revolving facilities totaled $2.425 billion.
- Total long-term debt and capital lease obligations were $20.81 billion, including $2.23 billion of current maturities. Debt and capital leases, net of current maturities, were $18.33 billion. AAG’s credit ratings were BB- from S&P and Fitch and Ba3 from Moody’s.
- Debt maturities totaled approximately $2.27 billion in 2016 and $3.59 billion in 2020. Approximately 38% of total long-term debt was variable rate.
- AAG returned $3.9 billion to shareholders through $3.6 billion of share repurchases and $278 million of dividends. It repurchased 85.1 million shares during 2015 and had $2.4 billion of remaining repurchase authorization at year-end.
- The company invested more than $5.3 billion in fleet renewal, took delivery of 75 new mainline aircraft, retired 112 mainline aircraft and added 52 regional aircraft.
Material changes versus the prior comparable period
- Profitability and operating cash flow increased substantially, primarily because fuel costs fell faster than passenger revenue.
- Revenue performance weakened as competitive capacity growth, reduced yields, foreign currency devaluation and economic weakness in Latin America offset higher traffic and load factors.
- Labor costs increased following ratified joint collective bargaining agreements with pilots, flight attendants and passenger service employees.
- Merger integration advanced materially: AAG received a single FAA operating certificate, implemented a single reservations system, integrated the Dividend Miles and AAdvantage programs, and completed the legal merger of US Airways into American.
- Share count declined materially because of repurchases and equity-award tax withholding; AAG had approximately 624.6 million shares outstanding at December 31, 2015 versus 697.5 million at December 31, 2014.
- Stockholders’ equity increased to $5.64 billion from $2.02 billion, primarily due to net income, despite substantial repurchases and dividends.
Guidance, outlook, unusual items and risks
Management did not provide a specific revenue or earnings forecast in the filing. It expected capital expenditures of approximately $4.5 billion in each of 2016 and 2017 and continued fleet renewal. Beginning in 2016, management expected an effective tax rate of approximately 38%, substantially non-cash while federal NOLs are used.
- AAG recorded a $3.0 billion non-cash tax benefit in 2015 after concluding that substantially all deferred tax assets were more likely than not to be realized. The benefit materially increased GAAP net income but did not provide comparable operating cash flow.
- The company recorded a $592 million charge to write off Venezuelan bolivars because of continuing repatriation restrictions and economic deterioration. Foreign currency losses totaled $751 million in 2015.
- Operating special charges totaled approximately $1.1 billion, principally merger integration costs for technology, labor alignment, professional fees, severance, fleet restructuring, rebranding, relocation and training.
- AAG had approximately $22.5 billion of aircraft and engine purchase commitments, including $4.5 billion due in 2016, and lacked financing commitments for specified aircraft deliveries through 2017 and substantially all deliveries thereafter.
- Major risks include fuel-price volatility, the absence of fuel hedges, intense fare competition, international currency and economic weakness, substantial debt and fixed obligations, pension funding requirements, labor disputes, airport and slot constraints, technology and cybersecurity failures, regulatory changes and ongoing merger integration.
- The company faced a DOJ investigation and approximately 100 putative class-action lawsuits concerning alleged coordination of air passenger capacity, as well as a DOJ inquiry into certain USPS international mail contracts. Outcomes could be material but were not estimable from the filing.
- American continued to contest claims relating to retiree post-employment benefits, including grievances totaling approximately $212 million. The financial statements did not reflect any potential benefit modification from the related bankruptcy proceeding.
Most important facts for investors to verify
- Reconcile GAAP earnings with adjusted earnings and separate the $3.0 billion non-cash tax benefit from recurring profitability.
- Assess revenue and margin sensitivity to further yield pressure, competitive capacity growth and foreign currency movements.
- Review unrestricted liquidity against the $2.0 billion minimum liquidity covenant, debt maturities, aircraft commitments and planned annual capital expenditures.
- Evaluate the sustainability of shareholder returns given the company’s leverage, fleet commitments and remaining repurchase authorization.
- Monitor the company’s full exposure to fuel prices: a one-cent-per-gallon change was estimated to affect annual 2016 fuel expense by approximately $44 million.
- Track outcomes of the DOJ investigations, antitrust litigation, OPEB claims and remaining disputed bankruptcy claims.
- Confirm the pace and cost of merger integration, labor contract harmonization, operational reliability and technology integration.