American Airlines Group Inc. — Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG), together with its wholly owned subsidiary American Airlines, Inc., operates a global network of nearly 6,700 daily flights to approximately 350 destinations in more than 50 countries. The filing covers the quarter and six months ended June 30, 2018, with comparisons to the same 2017 periods. Approximately 53 million passengers boarded flights during the second quarter.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $11.643 billion | $11.227 billion | $22.044 billion | $21.047 billion |
| Operating income | $1.028 billion | $1.599 billion | $1.459 billion | $2.336 billion |
| Operating margin | 8.8% | 14.2% | 6.6% | 11.1% |
| Pre-tax income | $769 million | $1.389 billion | $1.042 billion | $1.924 billion |
| Net income | $566 million | $864 million | $753 million | $1.204 billion |
| Net margin | 4.9% | 7.7% | 3.4% | 5.7% |
| Diluted EPS | $1.22 | $1.75 | $1.60 | $2.41 |
| Operating cash flow | Not separately provided | Not separately provided | $2.883 billion | $3.938 billion |
- Passenger revenue increased 3.1% in the quarter and 4.2% year to date. Cargo revenue increased 19.4% and 19.1%, respectively, while other revenue increased 8.1% and 9.0%.
- Quarterly revenue passenger miles increased 2.0%, available seat miles increased 1.6%, and the load factor improved 0.4 percentage points to 83.4%.
- Second-quarter TRASM increased 2.1% to 15.97 cents. Total CASM increased 8.5% to 14.56 cents; CASM excluding fuel and special items increased 2.4% to 10.83 cents.
- Fuel expense increased 39.3% in the quarter and 32.8% for the first six months. Average fuel price increased to approximately $2.24 per gallon in the quarter and $2.17 for the six-month period. AAG had no fuel hedging contracts outstanding.
- At June 30, AAG had $4.674 billion of unrestricted cash and short-term investments, $183 million of restricted cash and short-term investments, and $2.5 billion of undrawn revolving credit facilities. Total available liquidity was approximately $7.174 billion.
- Total long-term debt and capital lease obligations were $24.309 billion, including $2.213 billion of current maturities. AAG reported a stockholders’ deficit of $869 million, primarily reflecting the accounting treatment of the loyalty program and accumulated comprehensive losses.
- AAG repurchased 16.6 million shares for $800 million during the first six months and paid $94 million of dividends. A new $2.0 billion repurchase authorization was approved in April 2018, with $1.7 billion remaining at June 30.
Material changes versus the prior comparable period
- Quarterly operating income declined 35.7%, pre-tax income declined 44.7%, and net income declined 34.5%, despite a 3.7% increase in revenue.
- Six-month operating income declined 37.5%, pre-tax income declined 45.8%, and net income declined 37.5%, while revenue increased 4.7%.
- Management attributed the earnings deterioration primarily to higher fuel costs and, for the six-month period, higher wage rates. A PSA Airlines technology-system issue caused approximately 3,000 flight cancellations and reduced second-quarter pre-tax income by an estimated $35 million.
- AAG adopted ASC 606 using the full retrospective method. The change materially increased the deferred revenue liability associated with AAdvantage mileage credits and recast prior-period results. AAG also retrospectively reclassified non-service pension costs to nonoperating results.
- Total AAdvantage and air traffic contract liabilities increased to $14.187 billion at June 30, 2018, from $12.864 billion at December 31, 2017. The increase was driven primarily by a $1.470 billion increase in air traffic liability.
- Operating cash flow decreased $1.055 billion year over year, while capital expenditures and aircraft purchase deposits declined to $1.731 billion from $3.194 billion.
Outlook, unusual items, contingencies and risks
- Pre-tax special items totaled $232 million in the second quarter and $427 million for the first six months. Items included fleet restructuring, merger integration, bankruptcy-obligation mark-to-market adjustments, a Brazil route-authority impairment, litigation costs, equity-investment losses and debt refinancing charges.
- A preliminary $45 million settlement was reached in the U.S. private antitrust class actions concerning alleged air-capacity coordination; final court approval was pending at the filing date. DOJ investigations relating to passenger capacity and U.S. Postal Service contracts remained outstanding.
- The company expects ASC 842 lease adoption on January 1, 2019 to materially increase reported assets and liabilities, principally through recognition of operating-lease right-of-use assets and liabilities.
- AAG had approximately $10.0 billion of federal NOL carryforwards and $3.4 billion of state NOL carryforwards at December 31, 2017. The 2018 income tax provision was substantially non-cash because of NOL utilization, but the company had not completed its evaluation of the 2017 Tax Act.
- Aircraft and engine purchase commitments totaled approximately $14.934 billion for American, with 282 aircraft scheduled for delivery under disclosed orders. Financing commitments did not cover all aircraft scheduled for delivery after 2018.
- Management identified significant exposure to fuel-price volatility, economic downturns, intense airline competition, foreign currency movements, interest rates, labor costs and disruptions involving technology, airports, aircraft deliveries or regional carriers. A one-cent-per-gallon increase in fuel prices was estimated to increase annual 2018 fuel expense by approximately $45 million.
- Credit ratings at June 30, 2018 were BB- from S&P and Fitch and Ba3 from Moody’s for AAG. The company noted that downgrades could increase borrowing costs and restrict financing access.
Most important facts for investors to verify
- Whether revenue growth and continued positive unit-revenue trends can offset elevated fuel, labor, fleet-renewal and customer-service costs.
- The sustainability of approximately $7.2 billion of available liquidity relative to $24.3 billion of debt, substantial aircraft commitments and other contractual obligations.
- The effect of ASC 842 on leverage, balance-sheet presentation and covenant calculations beginning in 2019.
- The final resolution and potential additional exposure from DOJ investigations, antitrust litigation and other legal proceedings.
- The company’s ability to finance aircraft deliveries, meet pension obligations and maintain required minimum liquidity levels.
- The impact of AAdvantage liability estimates, mileage redemption patterns and the deferred-revenue accounting model on future revenue recognition.
- The effect of fuel prices, with no fuel hedges in place, and the sensitivity of earnings to interest-rate and foreign-currency movements.