American Airlines Group Inc. quarterly report, Q3 FY2016

American Airlines Group Inc. — Form 10-Q Summary

Business context and reporting period

Combined quarterly report for American Airlines Group Inc. (AAG) and wholly owned subsidiary American Airlines, Inc. for the quarter and nine months ended September 30, 2016. Results include American and former US Airways operations on a common-control basis for all periods presented. American and American Eagle operated approximately 6,700 daily flights to nearly 350 destinations; at September 30, 2016, the fleet comprised 922 mainline and 599 regional aircraft.

Key financial metrics

Metric	Q3 2016	Q3 2015	9M 2016	9M 2015
Operating revenue	$10.594 billion	$10.706 billion	$30.391 billion	$31.360 billion
Operating income	$1.431 billion	$1.999 billion	$4.517 billion	$5.136 billion
Operating margin	13.5%	18.7%	14.9%	16.4%
Pre-tax income	$1.189 billion	$1.709 billion	$3.799 billion	$4.371 billion
Net income	$737 million	$1.693 billion	$2.387 billion	$4.329 billion
Diluted EPS	$1.40	$2.49	$4.20	$6.17
Net cash from operating activities	Not separately provided	Not separately provided	$5.897 billion	$6.021 billion

Q3 net margin was approximately 7.0%, compared with 15.8% in the prior-year quarter. The nine-month net margin was approximately 7.9%, compared with 13.8% in 2015. Comparability of net income is affected by the 2016 income tax provision following the reversal of the deferred-tax-asset valuation allowance in 2015; management stated that the tax provision was substantially non-cash because of NOL utilization.

Mainline passenger revenue declined 3.1% in Q3 and 5.0% for the first nine months. Regional passenger revenue increased 1.9% in Q3 and 2.7% year to date.
Q3 total revenue per available seat mile declined 2.2% to 14.73 cents; nine-month TRASM declined 5.2% to 14.63 cents.
Q3 mainline and regional load factor declined 2.3 percentage points to 83.3%; nine-month load factor declined 1.2 points to 81.9%.
Q3 fuel expense declined 12.6% to $1.393 billion, and nine-month fuel expense declined 23.9% to $3.736 billion. The average Q3 fuel price fell 11.6% to $1.48 per gallon.
Salary, wage and benefit expense increased 15.3% in Q3 and 13.4% for the first nine months, reflecting new labor agreements and the employee profit-sharing program. Profit-sharing accruals were $86 million in Q3 and $257 million year to date.
Mainline CASM excluding special items and fuel increased 8.9% in Q3 to 9.32 cents and 4.8% for the first nine months to 9.35 cents.
Capital expenditures and aircraft purchase deposits were $4.271 billion in the first nine months. The company acquired newly delivered aircraft across Airbus, Boeing, Bombardier and Embraer fleets.

Liquidity, debt and capital allocation

At September 30, 2016, available liquidity was approximately $9.2 billion, consisting of $6.8 billion of unrestricted cash and short-term investments plus $2.425 billion of undrawn revolving capacity. Management seeks to maintain at least $6.5 billion of liquidity.
AAG reported $23.556 billion of long-term debt and capital lease obligations, including $1.798 billion of current maturities. American reported $21.776 billion, including $1.801 billion of current maturities.
First-nine-month financing included $5.392 billion of debt issuance and $2.534 billion of debt repayments. Major transactions included aircraft EETCs, a $1.0 billion term loan, JFK refinancing bonds and $1.4 billion of aircraft financing.
AAG repurchased 107.7 million shares for $3.9 billion during the first nine months and paid $172 million of dividends. Of $9.0 billion of authorized repurchase capacity, $555 million remained at September 30, 2016.
Total contractual obligations were $77.582 billion, including $21.776 billion of debt and capital leases, $19.114 billion of aircraft and engine purchase commitments, $13.099 billion of operating leases and $8.577 billion of regional capacity purchase commitments.

Material changes, outlook and unusual items

Performance deteriorated versus 2015 despite lower fuel prices. Revenue pressure came from competitive capacity growth, lower yields, weaker non-U.S. macroeconomic conditions and foreign-currency weakness. Cost pressure came primarily from labor, profit sharing, depreciation and integration-related expenses.
Q3 operating special charges were $294 million, principally $225 million of merger integration expenses and a $39 million bankruptcy-related charge. Nine-month pre-tax special items were $499 million versus $632 million in 2015.
Pre-tax income excluding special items was $1.483 billion in Q3 versus $1.895 billion in 2015, and $4.298 billion for the first nine months versus $5.003 billion.
Management provided no specific earnings, revenue or capacity guidance in the filing. It emphasized maintaining liquidity above $6.5 billion, continuing fleet renewal and integration, and actively managing costs.
The company had no fuel-hedging contracts outstanding and therefore remained fully exposed to fuel-price changes. Based on forecast consumption, each one-cent-per-gallon fuel-price increase was estimated to increase annual expense by approximately $43 million.
American reached or pursued several labor agreements, announced new co-branded credit-card arrangements, and reduced Republic Airways capacity to 76 E175 aircraft. A proposed $250 million unsecured claim against Republic remained subject to bankruptcy-court approval and had no quantifiable recovery value at filing.
Subsequent events included approximately $814 million of 2016-3 EETCs issued in October 2016 and a $0.10-per-share dividend declared for payment in November 2016.

Risks and contingencies

High leverage, substantial fixed obligations, aircraft purchase commitments and future pension funding requirements could constrain liquidity and financial flexibility. Financing commitments were not secured for certain aircraft deliveries through 2017 and substantially all aircraft deliveries in 2018 and beyond.
Credit facilities require minimum aggregate liquidity of at least $2.0 billion and contain collateral, payment, investment, lien and other covenants. Failure to comply could accelerate debt or permit credit-card processors to withhold customer proceeds.
Principal operating risks include fuel volatility, competitive capacity and pricing, labor disputes and pilot shortages, airport and weather disruptions, technology or cybersecurity failures, aircraft delivery delays, foreign exchange exposure, regulation and seasonality.
The DOJ was investigating potential coordination of passenger capacity, and approximately 100 related putative class actions had been consolidated. A separate DOJ inquiry concerned American’s 2009 and 2011 U.S. Postal Service contracts. The company stated that outcomes could be material but were not predictable.
Other contingencies included unresolved retiree-benefit litigation and approximately 25.2 million shares remaining in the bankruptcy disputed-claims reserve.
The filing states that AAG’s and American’s disclosure controls and procedures were effective as of September 30, 2016.

Facts investors should verify

Whether passenger yields, TRASM and load factors stabilized after the Q3 2016 declines.
Whether labor and profit-sharing costs continue to outpace revenue growth and fuel-cost benefits.
The sustainability of approximately $9.2 billion of liquidity after aircraft purchases, debt service, dividends and repurchases.
Financing plans and borrowing costs for the $19.1 billion aircraft and engine commitment pipeline.
Future pension contributions after favorable temporary funding rules expire and the effect of interest rates and asset performance.
Developments and potential financial exposure from the DOJ investigations, antitrust litigation, retiree-benefit proceedings and Republic Airways claim.
The effect of unhedged fuel exposure, foreign-currency movements, pilot availability and continued merger-system integration on operating reliability and margins.