American Airlines Group Inc. 2013 Form 10-K Summary
Business context and reporting period
American Airlines Group Inc. (formerly AMR Corporation) filed this combined Form 10-K for the fiscal year ended December 31, 2013. The company operates American Airlines and, following the December 9, 2013 merger, US Airways Group. Consolidated 2013 results include American for the full year and US Airways for only 23 days.
The company emerged from Chapter 11 on December 9, 2013, completed the US Airways merger, changed its name to American Airlines Group, and began trading as AAL on Nasdaq. American and US Airways continued to operate under separate operating certificates, with integration expected to take approximately 18 to 24 months.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $26.743 billion | $24.855 billion | +7.6% |
| Operating income | $1.399 billion | $148 million | + $1.251 billion |
| Operating margin | 5.2% | 0.6% | +4.6 points |
| Net loss | $1.834 billion | $1.876 billion | Improved $42 million |
| Net margin | (6.9%) | (7.5%) | Improved |
| Operating cash flow | $675 million | $1.285 billion | Down $610 million |
| Capital expenditures and aircraft deposits | $3.114 billion | $1.888 billion | Higher investment |
| Total cash and short-term investments | $10.286 billion | $4.742 billion | Up $5.544 billion |
| Long-term debt and capital leases | $15.353 billion | $7.116 billion | Higher following merger and financing |
Excluding the 23-day US Airways contribution, standalone operating income was $1.576 billion versus $148 million in 2012. Standalone net income excluding special items was $1.163 billion versus a $130 million loss in 2012. Reported 2013 net income was heavily affected by $2.655 billion of reorganization items and $536 million of operating special items.
Revenue growth reflected strong travel demand. Excluding the merger, passenger revenue increased approximately 4.0%, revenue passenger miles increased 1.7%, yield increased 2.3%, and capacity increased 1.3%. Total mainline and regional passenger load factor increased to 82.5% from 82.2%, while passenger revenue per available seat mile increased to 13.38 cents from 13.03 cents.
Fuel expense was $7.839 billion, representing approximately 31% of operating expenses. Average fuel cost declined to $3.09 per gallon from $3.20, but consumption increased 3.1%. Salaries, wages and benefits declined 12.2% on a consolidated basis, primarily due to restructuring actions and the freezing of American's pension plans.
Fourth-quarter performance
Fourth-quarter 2013 operating revenue was $7.367 billion, operating expenses were $7.252 billion, and operating income was $115 million, compared with operating income of $7 million in the fourth quarter of 2012. Fourth-quarter net loss was $2.000 billion, compared with net income of $263 million in the prior-year quarter.
The fourth-quarter loss primarily reflected approximately $1.7 billion of labor-related bankruptcy claims, a $74 million disputed-claim reserve adjustment, a $218 million adjustment related to the preferred-stock conversion discount, merger-related charges, and other special items. These items substantially obscure underlying fourth-quarter operating performance.
Cash flow, liquidity, debt and obligations
- Operating cash flow was $675 million, while investing cash outflow was $3.814 billion and financing cash inflow was $3.799 billion.
- Investing outflows included $3.114 billion of aircraft and other capital expenditures and $1.181 billion of net purchases of short-term investments.
- Financing inflows included $5.134 billion of long-term debt issuance and $1.700 billion of sale-leaseback proceeds, partly offset by $2.926 billion of debt and capital-lease repayments.
- As of year-end, unrestricted cash and short-term investments were approximately $9.251 billion; total cash and short-term investments, including $1.035 billion restricted, were $10.286 billion.
- Total AAG contractual obligations were approximately $91.1 billion, including $16.9 billion of debt and capital lease obligations, $51.6 billion of aircraft, engine and operating-lease commitments, and $12.2 billion of regional capacity-purchase obligations.
- AAG had $16.825 billion of total long-term debt and capital lease obligations before discounts and current maturities. The company was subject to minimum liquidity covenants of at least $2.0 billion, including a requirement under the US Airways facility that at least $750 million be held in controlled accounts.
- AAG contributed $489 million to defined benefit pension plans in 2013; the disclosed minimum required 2014 contribution was $120 million. Pension and postretirement liabilities totaled $5.828 billion.
Material changes versus the prior comparable period
- The December 9 merger added US Airways to the consolidated balance sheet and only 23 days of operating results, making reported year-over-year comparisons not directly comparable.
- Assets increased to $42.278 billion from $23.510 billion, primarily reflecting the merger, including $4.086 billion of goodwill and $1.501 billion of acquired identifiable intangibles.
- Debt and capital leases increased substantially, while liabilities subject to compromise declined from $6.606 billion to zero following emergence from Chapter 11 and settlement under the reorganization plan.
- Stockholders' deficit improved to $2.731 billion from $7.987 billion, but remained negative. Mandatorily convertible preferred stock and other bankruptcy settlement obligations totaled $5.928 billion at year-end.
- Mainline CASM excluding special items, fuel and profit sharing declined 4.5% to 8.50 cents, reflecting restructuring-related cost reductions.
- American's on-time performance improved to 77.6% from 76.9%, while mishandled baggage and customer complaint rates worsened.
Guidance, outlook, commentary and risks
Management stated that restructuring and the merger established a stronger competitive foundation, but did not provide a specific 2014 revenue, earnings or margin forecast in the filing. The company expected to benefit from fleet renewal, cost reductions and merger integration, while acknowledging uncertainty regarding fuel prices and economic conditions.
- Integration of operations, technology, labor groups, fleets, networks and customer systems was expected to require significant time and expense. Estimated cash transition costs were approximately $1.2 billion.
- The company had approximately $19.5 billion of planned aircraft and certain engine expenditures for 2014 through 2018 and lacked financing commitments for certain aircraft scheduled for delivery through 2016 and beyond.
- Only approximately 19% of projected consolidated 2014 fuel requirements were hedged as of January 2014, and management stated it had entered into no new fuel hedges since emergence and did not currently intend to do so. A $1 per barrel increase in crude oil was estimated to increase 2014 fuel expense by approximately $87 million after existing hedges.
- Approximately $710 million of unrestricted cash was held in Venezuelan bolivars at year-end. Currency controls, devaluation and repatriation delays of more than one year created material liquidity and valuation risk.
- Approximately 73% of employees were union-represented. Outstanding labor negotiations and the process of combining employee groups could result in higher costs, operational disruption or strikes.
- The company faced substantial fixed obligations, variable-rate debt, pension funding requirements, fuel-price exposure, competitive pressure from low-cost carriers, airport-slot restrictions, regulatory requirements and potential technology-integration failures.
- Pending litigation included private antitrust and merger-related actions, an adversary proceeding concerning retiree benefits, and other claims. The filing states that outcomes and potential financial effects remain uncertain.
- The company reported approximately $10.6 billion of federal NOL carryforwards and $4.7 billion of state NOL carryforwards, but future utilization could be limited by Section 382 ownership-change rules.
Important facts for investors to verify
- Reconcile reported AAG results with standalone American results and pro forma information because US Airways contributed only 23 days of 2013 revenue and earnings.
- Assess recurring profitability excluding reorganization, merger, tax and other special items, while recognizing that some integration costs may continue.
- Review liquidity covenant headroom against total cash, restricted cash, Venezuelan balances and potential credit-card processor holdbacks.
- Evaluate debt maturities, aircraft purchase commitments, lease obligations and the availability and cost of financing for aircraft deliveries.
- Monitor merger integration milestones, including a single operating certificate, technology integration, labor agreements and realization of expected synergies.
- Track fuel prices and the expiration of existing fuel hedges, particularly because management's stated policy was not to enter new hedges.
- Review disputed bankruptcy claims, preferred-stock conversions and remaining share distributions, which could materially affect dilution and former AMR shareholder recoveries.
- Verify the status and potential impact of pending antitrust, retiree-benefit and other litigation, as well as the ability to use NOL carryforwards.