American Airlines Group Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG) filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The filing also presents separate financial statements for wholly owned subsidiary American Airlines, Inc. Results primarily reflect the recovery in air-travel demand following COVID-19 disruptions, alongside substantially higher fuel, labor, regional, maintenance and other operating costs.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total operating revenue | $13.422 billion, up 79.5% | $22.321 billion, up 94.3% |
| Passenger revenue | $12.223 billion, up 86.8% | $20.041 billion |
| Operating income (loss) | $1.017 billion | $(706) million |
| Operating margin | 7.6% | (3.2%) |
| Pre-tax income (loss) | $603 million | $(1.483) billion |
| Net income (loss) | $476 million; diluted EPS $0.68 | $(1.159) billion; diluted EPS $(1.78) |
| Net margin | 3.5% | (5.2%) |
| Operating cash flow | Not separately reported for the quarter | $2.924 billion |
| Aircraft fuel expense | $4.020 billion | $6.522 billion |
| Total available liquidity | $15.585 billion at June 30 | $15.842 billion at December 31, 2021 |
| Long-term debt, including current maturities | $36.775 billion | $37.781 billion at December 31, 2021 |
Second-quarter operating statistics included a 86.9% passenger load factor, 36.9% growth in revenue passenger miles, 21.3% growth in available seat miles, a 36.4% increase in passenger yield and a 48.0% increase in total revenue per available seat mile to 20.29 cents. Total operating cost per available seat mile increased 45.3% to 18.75 cents, while CASM excluding fuel and special items increased 0.5% to 12.68 cents.
At June 30, AAG reported $12.522 billion of cash and short-term investments, including $401 million of cash and $12.121 billion of short-term investments, plus $3.063 billion of maximum undrawn revolving and other facilities. Restricted cash and short-term investments totaled $997 million. Stockholders’ deficit was $8.422 billion.
Material changes versus the prior comparable periods
- Second-quarter revenue increased $5.944 billion, primarily from recovering passenger demand, higher passenger yield and increased flying.
- Fuel expense increased $2.409 billion. The average fuel price including taxes rose to $4.03 per gallon from $1.91, while fuel consumption increased 18.1%.
- Salaries, wages and benefits increased 13.0% to $3.235 billion, reflecting higher staffing levels and labor costs. Regional expenses rose 68.5%, and maintenance expense rose 40.9%.
- Second-quarter 2021 benefited from approximately $1.455 billion of operating special credits related principally to U.S. Treasury payroll support assistance. The second quarter of 2022 had $5 million of net operating special items and $89 million of nonoperating special items.
- For the six months, operating cash flow declined $720 million to $2.924 billion. Excluding approximately $4.7 billion of 2021 payroll-support proceeds, management stated that operating cash flow improved by approximately $4.0 billion, primarily because of higher profitability.
- Capital expenditures were $1.405 billion for the six months, principally for 14 Airbus A321neo aircraft and 10 spare engines. AAG also invested $200 million in GOL.
- Financing cash flow shifted from $7.458 billion of inflow in the first half of 2021 to a $1.095 billion outflow in 2022. AAG repaid $1.659 billion of debt and finance leases, received $574 million from aircraft-related equipment notes and repurchased $349 million of unsecured notes.
Guidance, outlook, commentary and risks
Management did not provide a specific full-year earnings or revenue guidance figure in the filing. Management expects to meet cash obligations and remain in compliance with debt covenants for the next 12 months based on current assumptions regarding travel demand, available liquidity, anticipated financing access and projected operating cash flow. Management will continue adjusting capacity to observed booking trends.
Second-quarter 2022 capacity remained 8.5% below second-quarter 2019 levels, including domestic capacity down 6.6% and international capacity down 12.1%. Domestic and short-haul international demand had largely recovered to 2019 levels, but management stated that the timing of a complete recovery remained uncertain.
- 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 increase 2022 annual fuel expense by approximately $40 million.
- Debt agreements include liquidity, loan-to-value, collateral coverage and debt-service coverage requirements. Certain agreements require at least $2.0 billion of unrestricted cash and available revolving capacity; the company reported compliance at the applicable measurement dates.
- AAG had approximately $10.6 billion of borrowings linked to LIBOR, creating transition and potentially higher-interest risk as LIBOR is discontinued.
- The company faces continuing COVID-19, economic, inflation, higher-interest-rate, fuel-price, labor, pilot-shortage, staffing, supply-chain, aircraft-delivery and operational-reliability risks.
- Aircraft and engine purchase commitments totaled approximately $12.697 billion, with 200 aircraft under definitive purchase agreements. Financing commitments were not in place for most aircraft scheduled for delivery in 2023 and beyond.
- The Department of Justice antitrust action challenging the Northeast Alliance with JetBlue remained pending. The company also disclosed ongoing appeals in other antitrust litigation and warned that legal outcomes could be material.
- Government restrictions associated with payroll support assistance prohibited common-stock repurchases and dividends through September 30, 2022 and restricted certain executive compensation through April 1, 2023.
- The company recognized a $149 million noncash impairment charge for its retired Airbus A330 fleet during the first six months of 2022.
Most important facts for investors to verify
- Whether the improvement in reported profitability persists after fuel costs, labor costs and the absence of prior-year payroll-support credits.
- The sustainability and conversion of operating cash flow, particularly after aircraft purchases, airport projects, debt repayment and other contractual commitments.
- Liquidity headroom relative to the $2.0 billion covenant threshold, credit-card processor holdback provisions and secured-debt collateral requirements.
- Debt maturities, variable-rate exposure, LIBOR transition terms and the ability to finance future aircraft deliveries.
- Fuel-price sensitivity, given the absence of fuel hedges and the estimated $40 million annual impact of each one-cent-per-gallon change.
- Progress and potential remedies in the DOJ’s Northeast Alliance litigation with JetBlue.
- Capacity, staffing, pilot availability and operational reliability as demand returns toward pre-pandemic levels.
- Potential changes in aircraft values, goodwill or other intangible assets, tax-attribute usability and deferred-tax valuation allowances.