Business Context and Reporting Period
Company: AMR Corporation (Parent of American Airlines, Inc.)
Filing Type: Form 8-K (Current Report)
Reporting Period: Second Quarter ended June 30, 2009
Date of Filing: July 15, 2009
AMR Corporation reported its second-quarter 2009 results, highlighting the impact of a weakened global economy, reduced travel demand, and the H1N1 virus on revenue. The company emphasized liquidity management, fleet renewal, and capacity discipline as key strategic responses to the challenging environment.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 |
|---|---|---|
| Net Loss | $(390) million | $(1,461) million |
| Net Loss (Excl. Special Items) | $(319) million | $(298) million |
| Loss Per Share (Diluted) | $(1.39) | $(5.83) |
| Operating Revenues | $4,889 million | $6,179 million |
| Operating Expenses | $5,115 million | $7,469 million |
| Cash & Short-Term Investments | $3.3 billion | $5.5 billion |
| Total Debt | $14.2 billion | $15.2 billion |
| Net Debt | $11.4 billion | $10.1 billion |
Operational Highlights:
- Passenger Revenue: $3,677 million (down 22.3% YoY).
- Cargo Revenue: $134 million (down 42.6% YoY).
- Load Factor: 81.8% (down 0.6 percentage points YoY).
- Unit Revenue (RASM): 9.53 cents (down 16.0% YoY).
- Unit Cost (CASM): 11.76 cents excluding regional affiliates (down 25.5% YoY); excluding fuel and special items, costs increased 5.0% YoY.
- Fuel Price: $1.90 per gallon (down 41% YoY).
Material Changes vs. Prior Period
Revenue Decline: Consolidated revenues decreased 20.9% year-over-year, driven by a 7.6% reduction in mainline capacity and a 15.4% decrease in yield due to aggressive industry pricing and reduced premium cabin traffic. The H1N1 virus is estimated to have reduced Q2 revenue by $50 million to $80 million.
Cost Reductions: Total operating expenses fell 31.5% year-over-year. This significant decrease was primarily due to a 44.9% drop in aircraft fuel expenses and the absence of the $1.1 billion non-cash asset write-down recorded in Q2 2008. However, non-fuel unit costs increased 5% year-over-year due to pension expenses and capacity reduction costs.
Liquidity and Debt: While cash balances decreased from $5.5 billion to $3.3 billion due to debt maturities and capital lease payments, the company reduced Total Debt by $1.0 billion. Net Debt increased to $11.4 billion from $10.1 billion, reflecting the drawdown of cash reserves.
Guidance, Outlook, and Risks
Capacity Guidance: AMR expects full-year 2009 mainline capacity to decrease by approximately 7.5% compared to 2008. For the third quarter of 2009, mainline capacity is expected to decrease by 8.5% year-over-year.
Fuel Outlook: The company plans for an average system fuel price of $2.05 per gallon in Q3 2009 and $1.98 per gallon for the full year 2009. Approximately 36% of full-year consumption is hedged.
Cost Outlook: Full-year mainline unit costs are expected to decrease 9.2% in 2009. However, unit costs excluding fuel are expected to increase 6.6% year-over-year due to pension expenses and inflation.
Strategic Initiatives:
- Completed a $520 million public offering of enhanced equipment trust certificates.
- Added $66 million in liquidity via an aircraft sale-leaseback transaction.
- Announced plans to take delivery of eight additional Boeing 737-800s.
- Anticipates DOT approval for global antitrust immunity with one world alliance members (British Airways, Iberia, Royal Jordanian, Finnair) in the fall of 2009.
Risks and Contingencies:
- Economic Weakness: Continued global economic downturn affecting travel demand.
- Fuel Volatility: Rising and volatile spot prices for oil.
- Liquidity Needs: Requirement to raise substantial additional funds on acceptable terms.
- Regulatory: Uncertainty regarding antitrust immunity approval.
- Health: Potential impact of disease outbreaks (e.g., H1N1) on travel behavior.
Investor Verification Checklist
- Liquidity Sufficiency: Verify the $3.7 billion in estimated unencumbered assets and the ability to cover debt maturities through 2011.
- Non-GAAP Reconciliation: Review the reconciliation of Net Loss excluding special items ($319 million loss) to understand the impact of the $70 million in non-recurring charges.
- Fleet Financing: Confirm the status of the $520 million public offering and the committed financing covering all firm 737 orders through 2011.
- Antitrust Approval: Monitor the timeline for DOT and EU regulatory approval of the one world alliance antitrust immunity application.
- Cost Structure: Assess the sustainability of the 5% increase in non-fuel unit costs against the backdrop of capacity reductions.