Business Context and Reporting Period
American Airlines Group Inc. (AAG), together with wholly owned subsidiary American Airlines, Inc., operates a global airline network averaging nearly 6,700 daily flights to approximately 350 destinations in more than 50 countries. The unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total operating revenue | $10.401 billion | $9.820 billion | 5.9% increase |
| Operating income | $431 million | $737 million | 41.4% decrease |
| Operating margin | 4.1% | 7.5% | Down approximately 3.4 points |
| Pre-tax income | $273 million | $535 million | 48.9% decrease |
| Net income | $186 million | $340 million | 45.2% decrease |
| Diluted EPS | $0.39 | $0.67 | Decrease |
| Net margin | 1.8% | 3.5% | Down approximately 1.7 points |
| Operating cash flow | $1.799 billion | $2.250 billion | $451 million decrease |
- Passenger revenue increased 5.4% to $9.480 billion; cargo revenue increased 18.8% to $227 million; and other revenue increased 10.0% to $694 million.
- Revenue passenger miles increased 3.8%, available seat miles increased 2.3%, and passenger load factor improved to 80.4% from 79.2%. Total revenue per available seat mile increased 3.5% to 15.80 cents.
- Total operating expenses increased 9.8% to $9.970 billion. Fuel expense increased 25.8% to $1.763 billion, while salaries, wages and benefits increased 5.5% to $3.017 billion.
- Total operating cost per available seat mile increased 7.3% to 15.15 cents. CASM excluding special items and fuel increased 2.8% to 11.57 cents.
- Pre-tax income excluding special items was $468 million, compared with $661 million in the prior-year period. Pre-tax special items were $195 million in 2018 versus $126 million in 2017.
- At March 31, 2018, AAG had $4.994 billion of short-term investments, $297 million of cash and $294 million of restricted cash and short-term investments. Total available liquidity was approximately $7.8 billion, including $2.5 billion of undrawn revolving credit facilities.
- AAG reported $24.969 billion of long-term debt and capital lease obligations, including $2.793 billion of current maturities. The carrying value of debt, including current maturities, was $24.739 billion and estimated fair value was $25.286 billion.
- Stockholders’ deficit was $1.018 billion at March 31, 2018, compared with a deficit of $780 million at December 31, 2017.
Material Changes Versus the Prior Comparable Period
- Revenue growth was outweighed by cost inflation, particularly higher fuel prices and labor costs. The average fuel price increased approximately 23.6% to $2.10 per gallon, and Brent crude averaged approximately $67 per barrel versus $54 in the prior-year quarter.
- The company’s lower profitability reflected the $441 million increase in mainline and regional fuel expense and higher wage rates, partially offset by higher passenger, cargo and loyalty-related revenue.
- Operating special items increased primarily because of higher fleet restructuring, labor contract and other operating charges. Fleet restructuring expenses were $82 million, merger integration expenses were $59 million, labor contract expenses were $13 million and other operating charges were $41 million.
- Operating cash flow declined despite lower capital expenditures. Capital expenditures and aircraft purchase deposits were $779 million, compared with $1.714 billion in Q1 2017.
- AAG repurchased 8.4 million shares for $450 million and paid $48 million of dividends during the quarter. The prior $11.0 billion repurchase authorization was fully utilized by March 31, 2018.
- Debt repayments of $569 million exceeded new debt issuance of $236 million during the quarter. Net financing cash outflow was $841 million, including repurchases and dividends.
- Effective January 1, 2018, AAG adopted the revenue recognition standard using the full retrospective method. The new method increased the loyalty program liability and deferred more value from passenger tickets, materially reducing previously reported stockholders’ equity; prior periods were recast.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear formal full-year earnings or revenue guidance range. Management reported continued strong demand and positive unit revenue trends, with international markets, particularly Latin America, outperforming domestic markets. Management also noted that Q1 2018 was the sixth consecutive quarter of positive TRASM growth.
- AAG had no fuel hedging contracts outstanding at March 31, 2018 and remains fully exposed to fuel-price movements. Management estimated that a one-cent-per-gallon increase in aviation fuel prices would increase 2018 annual fuel expense by approximately $45 million.
- Management expects significant continuing capital requirements. Consolidated aircraft and engine purchase commitments for 2018–2022 were estimated at approximately $8.9 billion, and many aircraft scheduled for delivery after 2019 did not yet have financing commitments.
- In April 2018, AAG authorized a new $2.0 billion share repurchase program expiring December 31, 2020 and declared another $0.10-per-share dividend.
- In April 2018, American agreed to acquire 47 additional Boeing 787 aircraft, deferred delivery of 40 Boeing 737 MAX aircraft, and terminated its agreement to acquire 22 Airbus A350 aircraft.
- Key risks include fuel-price volatility, high leverage and fixed obligations, interest-rate and foreign-currency exposure, pension funding, aircraft financing availability, labor costs and disruptions, intense airline competition, cybersecurity and technology failures, weather and geopolitical events, regulatory changes, airport and air-traffic constraints, and ongoing litigation.
- Material legal matters include DOJ investigations involving passenger-capacity coordination and postal-service contracts, approximately 100 related private antitrust lawsuits, and litigation challenging aspects of the 2013 merger. Management believes the claims lack merit, but states that ultimate financial and operational effects could be material.
- AAG contributed $155 million to defined benefit pension plans in Q1 2018, including $116 million of supplemental contributions. Management noted that minimum pension funding obligations may increase materially beginning in 2019.
- The company expects adoption of the new lease standard on January 1, 2019 to materially affect the balance sheet through recognition of right-of-use assets and lease liabilities.
Most Important Facts for Investors to Verify
- Whether revenue growth and improving load factors can offset continued fuel inflation, wage increases and higher non-fuel unit costs.
- The sustainability of approximately $7.8 billion of available liquidity relative to $25.0 billion of debt, $2.8 billion of current debt maturities and substantial aircraft, lease and pension commitments.
- The amount and timing of financing required for aircraft deliveries, particularly deliveries after 2019 for which financing was not yet committed.
- The effect of the new loyalty-program revenue model and related $8.786 billion liability on future revenue timing, earnings and equity.
- Exposure to unhedged fuel prices, variable-rate debt and foreign currencies, including the filing’s sensitivity estimates.
- Developments in DOJ investigations, antitrust litigation, merger-related claims and postemployment-benefit litigation.
- Whether the new repurchase authorization and continuing dividends remain appropriate given leverage, capital commitments and operating cash flow.