Business Context and Reporting Period
American Airlines Group Inc. (AAG), together with wholly owned American Airlines, Inc. and regional carriers operating as American Eagle, filed this Form 10-K for the fiscal year ended December 31, 2018. The company operated nearly 6,700 daily flights to nearly 350 destinations in more than 50 countries, carried approximately 204 million passengers, and operated 956 mainline and 595 regional aircraft at year-end.
The filing also provides unaudited fourth-quarter data. Fourth-quarter 2018 operating revenue was $10.9 billion, operating income was $571 million, and net income was $325 million.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total operating revenue | $44.541 billion | $42.622 billion | 4.5% increase |
| Operating expenses | $41.885 billion | $38.391 billion | 9.1% increase |
| Operating income | $2.656 billion | $4.231 billion | 37.2% decrease |
| Net income | $1.412 billion | $1.282 billion | 10.2% increase |
| Diluted EPS | $3.03 | $2.61 | 16.1% increase |
| Operating margin | 6.0% | 9.9% | Down approximately 3.9 points |
| Net margin | 3.2% | 3.0% | Up approximately 0.2 points |
Passenger revenue increased 3.9% to $40.676 billion, supported by a 2.1% increase in revenue passenger miles and a 1.8% increase in passenger yield. Cargo revenue rose 13.8% to $1.013 billion, while other revenue increased 9.7% to $2.852 billion, primarily due to higher loyalty-program revenue.
Revenue passenger load factor was 82.0%, up from 81.9%. Total revenue per available seat mile increased 2.4% to 15.79 cents. Total cost per available seat mile increased 6.9% to 14.85 cents, while CASM excluding special items and fuel increased 1.4% to 11.06 cents.
Fuel was the principal cost pressure. Mainline and regional fuel expense increased 31.8% to $9.896 billion, and the average fuel price rose 29.0% to $2.23 per gallon. Salaries, wages and benefits increased 2.5% to $12.251 billion. The company had no fuel-hedging contracts outstanding at year-end.
GAAP pre-tax income declined to $1.884 billion from $3.395 billion. Pre-tax income excluding special items declined to $2.790 billion from $4.151 billion. Net income excluding special items was $2.117 billion, compared with $2.592 billion in 2017.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $3.533 billion, down from $4.744 billion in 2017.
- Capital expenditures and aircraft purchase deposits were $3.745 billion; net cash used in investing activities was $1.973 billion.
- Net cash used in financing activities was $1.672 billion, including $2.941 billion of debt repayments, $837 million of share repurchases and $186 million of dividends, partly offset by $2.354 billion of debt issuance.
- Total available liquidity was approximately $7.6 billion, consisting of $4.8 billion of unrestricted cash and short-term investments and $2.8 billion of undrawn revolving credit facilities. Restricted cash and short-term investments were $154 million.
- Debt and finance leases were $24.473 billion at year-end. Operating lease liabilities recognized under the new lease standard were $9.556 billion, bringing substantial additional fixed obligations onto the balance sheet.
- AAG had approximately $2.0 billion of unrestricted cash and revolver availability above the $2.0 billion minimum liquidity covenant described in its debt agreements.
In 2018, the company refinanced $1.8 billion of term loans, raised $1.9 billion through aircraft and pre-delivery deposit debt financing, completed approximately $1.1 billion of aircraft sale-leaseback financing, and increased revolving credit commitments by $343 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was positive, but expense growth substantially exceeded revenue growth because of higher fuel costs and, to a lesser extent, labor and fleet-related costs.
- Operating income fell 37.2% and adjusted pre-tax income fell 32.8%, despite stronger demand, higher yields and improved unit revenue.
- Net income and EPS increased primarily because the 2017 results included a $823 million non-cash tax charge from the 2017 Tax Act; the 2018 tax provision was $472 million versus $2.113 billion in 2017.
- The company adopted the new revenue and retirement-benefit standards retrospectively and early adopted the new lease standard effective January 1, 2018. The lease adoption added approximately $10 billion of operating lease liabilities and produced a $197 million after-tax credit to opening retained earnings.
- Operating lease liabilities and right-of-use assets were recognized for the first time, materially increasing reported assets and liabilities without representing a comparable increase in operating cash costs.
- Share repurchases declined to $800 million and 16.6 million shares from $1.6 billion and 33.9 million shares in 2017. Remaining repurchase authorization was $1.7 billion at year-end.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide a specific 2019 earnings, revenue or margin guidance target. Management emphasizes continued exposure to fuel prices, economic conditions, competition, labor costs and international demand. Based on forecast 2019 fuel consumption, each one-cent-per-gallon increase in fuel prices would increase annual fuel expense by approximately $45 million.
- Major 2018 special items included $422 million of fleet restructuring expense, $268 million of merger integration expense, $58 million of severance expense, a $45 million antitrust litigation settlement, a $26 million Brazil route-authority impairment, and a $76 million credit from mark-to-market adjustments on bankruptcy obligations.
- The company expects approximately $8.4 billion of aircraft and certain engine expenditures during 2019–2023 and had total aircraft and engine purchase commitments of approximately $14.458 billion at year-end.
- At year-end, the company had $22.722 billion of American long-term debt principal, with $2.508 billion scheduled for repayment in 2019. Approximately 40% of total long-term debt was variable-rate debt, primarily exposed to LIBOR and other floating rates.
- Minimum 2019 pension contributions were estimated at approximately $786 million for AAG, plus a supplemental contribution of $21 million. Pension and postretirement obligations totaled $6.937 billion.
- Approximately 84% of employees were represented by labor unions. Negotiations continued for several collective bargaining agreements, and approximately 22% of employees were covered by agreements becoming amendable within one year.
- Material legal matters include approximately 100 putative passenger-capacity antitrust class actions, a merger-related antitrust lawsuit scheduled for trial in March 2019, and a Department of Justice investigation concerning certain U.S. Postal Service contracts.
- Other principal risks include fuel-price volatility without hedging, high leverage and collateral requirements, pilot and skilled-labor shortages, airport and slot constraints, operational disruptions, cybersecurity incidents, regulatory changes, Brexit-related uncertainty, foreign-exchange exposure, climate-related costs and the ability to use tax net operating losses.
Investor Verification Checklist
- Reconcile reported GAAP results with management’s special-item-adjusted measures, particularly the effect of fuel costs and the 2017 Tax Act comparison.
- Review debt maturities, variable-rate exposure, collateral requirements and compliance with the $2.0 billion minimum liquidity covenant.
- Assess whether available liquidity is adequate relative to aircraft commitments, lease obligations, pension funding, debt repayments and regional capacity-purchase commitments.
- Monitor fuel prices because the company had no fuel hedges and disclosed approximately $45 million of annual expense sensitivity for each one-cent-per-gallon increase.
- Evaluate the status and potential financial impact of labor negotiations, antitrust proceedings, the DOJ investigation and credit-card processor holdback provisions.
- Adjust year-over-year balance-sheet analysis for the 2018 lease adoption and distinguish accounting changes from underlying operating trends.
- Assess the sustainability of share repurchases and dividends given leverage, capital expenditures and pension obligations.