American Airlines Group Inc. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG) and wholly owned subsidiary American Airlines, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company operated approximately 6,800 daily flights to more than 365 destinations in over 60 countries and carried approximately 56 million passengers during the third quarter.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenue | $11.911 billion | $11.559 billion | $34.455 billion | $33.603 billion |
| Operating income | $808 million | $685 million | $2.336 billion | $2.085 billion |
| Operating margin | 6.8% | 5.9% | 6.8% | 6.2% |
| Pre-tax income | $557 million | $496 million | $1.685 billion | $1.489 billion |
| Net income | $425 million | $372 million | $1.272 billion | $1.088 billion |
| Net margin | 3.6% | 3.2% | 3.7% | 3.2% |
| Diluted EPS | $0.96 | $0.81 | $2.84 | $2.33 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $3.215 billion | $2.817 billion |
- Passenger revenue increased 4.1% to $10.995 billion in the third quarter; cargo revenue declined 19.9% to $208 million and other revenue declined 4.1% to $708 million.
- Revenue passenger miles increased 4.9%, available seat miles increased 1.0%, and passenger load factor improved 3.2 percentage points to 85.6%.
- Total revenue per available seat mile increased 2.0% to 15.71 cents. Total CASM increased 1.0% to 14.64 cents, while CASM excluding fuel and special items increased 4.8% to 11.07 cents.
- Mainline and regional fuel expense declined 9.7% to $2.474 billion, reflecting an 11.1% decline in the average fuel price to $2.05 per gallon. The company had no fuel hedging contracts outstanding.
- At September 30, AAG had $312 million of cash, $4.856 billion of short-term investments and $2.843 billion of undrawn revolving credit capacity, or approximately $8.0 billion of total available liquidity. Restricted cash and short-term investments were $158 million.
- AAG reported $24.782 billion of long-term debt before discounts and issuance costs, including $3.504 billion of current maturities. American separately reported $22.753 billion of long-term debt before discounts and issuance costs.
- Total liabilities exceeded total assets by only slightly at AAG, with stockholders’ equity of $160 million at September 30, 2019, compared with a deficit of $169 million at December 31, 2018.
Material changes versus the prior comparable period
- Third-quarter operating income rose 18.0%, pre-tax income rose 12.4%, and net income rose 14.2%, primarily because of higher passenger revenue and lower fuel costs. These benefits were partly offset by higher labor, maintenance and regional expenses.
- For the first nine months, revenue increased 2.5% and operating expenses increased 1.9%. Pre-tax income excluding net special items was $2.221 billion, broadly comparable with $2.200 billion in the prior-year period.
- Salaries, wages and benefits increased 2.8% in the third quarter. Maintenance expense increased 15.9%, and regional expenses increased 5.5%, reflecting higher capacity and maintenance activity.
- Operating cash flow increased $398 million year over year to $3.215 billion, while capital expenditures and aircraft purchase deposits increased to $3.129 billion from $2.736 billion.
- Net cash used in investing activities increased to $2.882 billion, primarily because of higher capital spending and net purchases of short-term investments. Net cash used in financing activities declined to $296 million from $1.318 billion.
- Debt issuance proceeds increased to $3.550 billion, including $750 million of 5.0% senior notes due 2022 and aircraft and engine financings. The company repaid $2.835 billion of debt and finance leases.
- AAG repurchased 23.9 million shares for $800 million during the first nine months and paid $135 million of dividends. Remaining authorization under the current repurchase program was $850 million at September 30.
Guidance, outlook, management commentary, risks and unusual items
- The filing does not provide a broad formal earnings or revenue forecast. Management estimated that Boeing 737 MAX cancellations reduced third-quarter 2019 pre-tax income by approximately $140 million and expected a full-year 2019 pre-tax impact of approximately $540 million. All MAX flying had been removed from the schedule through January 15, 2020.
- AAG had 24 Boeing 737 MAX aircraft in its fleet and 76 on order. The grounding caused 9,475 cancelled flights in the third quarter and delayed planned deliveries.
- Third-quarter pre-tax net special items totaled $278 million, including a $201 million non-cash Embraer E190 fleet impairment, $72 million of fleet restructuring costs, $29 million of merger integration costs, a $53 million litigation reserve benefit and $45 million of net investment mark-to-market losses.
- The company paid $22 million in August 2019 to settle a Department of Justice investigation concerning certain U.S. Postal Service contracts, without admitting liability. A $45 million passenger-capacity antitrust settlement had been approved but remained subject to appeals.
- Management cited risks from fuel-price volatility, the absence of fuel hedging, economic and travel-demand weakness, intense competition, high leverage, variable-rate debt, aircraft financing and purchase commitments, pension obligations, labor disputes, pilot shortages, operational disruptions, regulatory changes, foreign exchange, Brexit, tariffs, cybersecurity and litigation.
- American contributed $1.2 billion to defined benefit pension plans during the first nine months, exceeding the estimated $786 million minimum required contribution for 2019.
- As of September 30, 2019, the company had contractual obligations totaling approximately $75.8 billion, including debt, interest, aircraft purchases, leases, regional capacity commitments, pension obligations and other purchase commitments.
- The company expected approximately $8.4 billion of aggregate aircraft and certain engine expenditures for 2019–2023. Financing commitments did not cover all aircraft scheduled for delivery after 2020.
- Management stated that AAG’s and American’s disclosure controls and procedures were effective as of September 30, 2019.
Important facts for investors to verify
- Whether Boeing 737 MAX return-to-service timing, cancellations and delivery delays differ materially from the company’s estimates.
- Whether higher labor, maintenance, regional and other non-fuel costs continue to outpace revenue growth.
- The timing and funding of near-term debt maturities, including $750 million due in October 2019 and $500 million due in March 2020.
- Whether operating cash flow and available financing remain sufficient for aircraft purchases, pension contributions, debt service and other contractual obligations.
- Exposure to fuel prices without hedging; management estimated that each one-cent-per-gallon increase would raise annual fuel expense by approximately $45 million based on forecast consumption.
- Progress and outcomes in the pending antitrust litigation, labor-related proceedings, and other legal matters.
- The sustainability of share repurchases and dividends given the company’s leverage, capital commitments and liquidity requirements.
- The effect of tariffs on Airbus aircraft, Brexit-related aviation arrangements, foreign exchange movements and other international regulatory developments.