American Airlines Group Inc. quarterly report, Q1 FY2021

American Airlines Group Inc. — Q1 2021 Form 10-Q Summary

Business context and reporting period

American Airlines Group Inc. (AAG) and wholly owned subsidiary American Airlines, Inc. reported unaudited results for the three months ended March 31, 2021. Results remained heavily affected by COVID-19 travel restrictions and depressed demand, although domestic and short-haul demand began to recover. First-quarter capacity declined 39.2% year over year, including domestic capacity down 36.8% and international capacity down 45.1%.

Key financial metrics

Metric	Q1 2021	Q1 2020	Change
Total operating revenue	$4.008 billion	$8.515 billion	Down 52.9%
Passenger revenue	$3.179 billion	$7.681 billion	Down 58.6%
Cargo revenue	$315 million	$147 million	Increased by $168 million
Operating expenses	$5.323 billion	$11.064 billion	Down 51.9%
Operating loss	$1.315 billion	$2.549 billion	Improved by $1.234 billion
Pre-tax loss	$1.573 billion	$2.890 billion	Improved by $1.317 billion
Net loss	$1.250 billion	$2.241 billion	Improved by $991 million
Basic and diluted loss per share	$1.97 loss	$5.26 loss	Improved
Net cash from operating activities	$174 million	$168 million used	Improved by $342 million

Reported results benefited from approximately $1.9 billion of net pre-tax special credits, principally $2.1 billion of recognized PSP2 payroll support assistance, partly offset by severance and other special charges. Excluding net special items, pre-tax loss was $3.519 billion versus $1.448 billion in Q1 2020, reflecting the continuing revenue shortfall.

Total revenue per available seat mile was 10.61 cents, down 22.6%.
Total operating cost per available seat mile was 14.09 cents, compared with 17.82 cents; excluding fuel and special items, CASM increased to 16.45 cents from 12.97 cents because of lower capacity.
Revenue passenger miles declined 50.3%, and passenger load factor fell 13.2 points to 59.5%.
Aircraft fuel expense declined 42.0% to $1.034 billion. The average fuel price declined to $1.70 per gallon from $1.83. The company had no fuel hedges and remained fully exposed to fuel-price changes.
At March 31, 2021, AAG reported $17.336 billion of available liquidity, including $14.039 billion of cash and short-term investments and $3.297 billion of undrawn facilities.
AAG reported $39.639 billion of gross long-term debt, including $2.339 billion of current maturities, versus $32.770 billion at December 31, 2020.
Stockholders’ deficit was $7.945 billion at March 31, 2021, compared with $6.867 billion at year-end 2020.

Material changes versus the prior comparable period

Passenger revenue and capacity contracted sharply because of COVID-19, while cargo revenue more than doubled, aided by higher cargo yields and cargo-only flights.
Operating expenses declined through schedule reductions, permanent cost actions, lower fuel consumption and PSP2 assistance. Management estimated more than $1.3 billion of permanent 2021 operating-expense reductions, including approximately $600 million of labor productivity savings, $500 million of management compensation savings and $200 million of other savings.
Interest expense increased 43.9% to $371 million due to debt issued after Q1 2020 to strengthen liquidity.
Operating cash flow turned positive, but excluding approximately $2.1 billion of PSP2 cash proceeds, operating cash flow declined by approximately $1.8 billion year over year.
AAG issued 18.2 million common shares through an at-the-market offering for $316 million of net proceeds.
Employee headcount declined 13.9% to approximately 113,200 full-time equivalent employees, and an additional 1,600 employees opted into voluntary early retirement programs.

Financing, outlook, risks and unusual items

In March 2021, AAG completed AAdvantage financing consisting of $3.5 billion of 5.50% senior secured notes due 2026, $3.0 billion of 5.75% senior secured notes due 2029 and a $3.5 billion term loan. The financing is secured by specified AAdvantage loyalty-program agreements, intellectual property and related assets.
Proceeds were used partly to repay $2.8 billion drawn under revolving facilities and the $550 million Treasury term loan, which was terminated.
PSP2 provided approximately $3.1 billion of assistance through March 2021. AAG recorded an $896 million promissory note and warrants for approximately 5.7 million shares at a $15.66 exercise price. Management subsequently disclosed that an additional $463 million of PSP2 assistance was expected, increasing the note to approximately $1.0 billion and warrants to approximately 6.6 million shares.
Management expected Q2 2021 system capacity to be 20% to 25% below Q2 2019 levels and planned to continue matching capacity to booking trends. It expected to meet cash obligations and remain in compliance with debt covenants for the next 12 months under its current assumptions, including anticipated ARP assistance and operating cash flows.
Management disclosed eligibility for approximately $3.3 billion of PSP3 assistance under the American Rescue Plan, expected in April and May 2021. PSP3 would include restrictions on employee furloughs, dividends, share repurchases and executive compensation, together with a $963 million promissory note and warrants for approximately 4.4 million shares at a $21.75 exercise price.
COVID-19 assistance was subject to restrictions, including use for eligible employee compensation, limits on involuntary furloughs, restrictions on dividends and repurchases through at least September 30, 2022, and executive-compensation limits through April 1, 2023.
Other unusual items included $168 million of severance expense, a $139 million special charge for enhanced retiree medical benefits, a $27 million non-cash fleet impairment and $241 million of pension contributions.
AAG had approximately $92.5 billion of consolidated contractual obligations, including debt, interest, leases, aircraft purchases, regional capacity agreements, pension obligations and other purchase commitments.

Principal risks and contingencies

Demand, revenue and liquidity remained dependent on the duration of COVID-19, vaccine effectiveness and distribution, travel restrictions, government mandates and potential permanent changes in business travel.
High leverage, substantial aircraft and lease commitments, non-investment-grade credit ratings, collateral requirements and possible additional financing needs could constrain financial flexibility.
Debt agreements generally required at least $2.0 billion of unrestricted cash and available revolving capacity. AAdvantage financing also contained debt-service coverage, loyalty-program and collateral-related covenants.
Credit-card processors could impose cash or collateral holdbacks if liquidity or other conditions deteriorate, potentially reducing available liquidity materially.
AAG had $12.6 billion of LIBOR-based borrowings and had not hedged its interest-rate exposure. LIBOR replacement could increase borrowing costs.
Fuel prices, international restrictions, foreign exchange, labor relations, regional-carrier financial stress, aircraft delivery delays, regulatory actions, cybersecurity incidents and litigation could materially affect results.
Approximately $16.5 billion of federal NOLs and $5.0 billion of state NOLs were available at December 31, 2020, but utilization could be limited by future taxable income, expiration and ownership-change rules.
Pending legal matters included appeals related to a $45 million passenger-capacity antitrust settlement and an appeal of a bankruptcy-court ruling favorable to American in merger-related antitrust litigation. The ultimate effects were described as uncertain and potentially material.

Important facts for investors to verify

Separate recurring operating performance from the approximately $1.9 billion of net special credits, especially PSP2 assistance.
Confirm the timing and accounting treatment of additional PSP2 and PSP3 assistance, related promissory notes and Treasury warrants.
Monitor passenger demand, load factor, capacity, PRASM/TRASM and adjusted CASM as government restrictions ease.
Assess whether liquidity remains above the $2.0 billion covenant threshold after debt service, refunds, collateral requirements and operating cash burn.
Review the maturity profile, interest burden and covenant restrictions associated with the AAdvantage financing and total debt.
Evaluate the ability to finance approximately $9.4 billion of planned aircraft and engine expenditures for 2021–2025 while maintaining liquidity.
Track fuel-price exposure, LIBOR transition risk, pension obligations, labor negotiations and potential credit-card processor holdbacks.