American Airlines Group Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG), through wholly owned American Airlines, Inc., operates a global passenger and cargo airline. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Results remained significantly affected by COVID-19, travel restrictions, the Delta variant and an uneven recovery in international demand.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total operating revenue | $8.969 billion | $3.173 billion | $20.455 billion | $13.309 billion |
| Operating income (loss) | $595 million | $(2.871) billion | $(279) million | $(7.906) billion |
| Net income (loss) | $169 million | $(2.399) billion | $(1.061) billion | $(6.707) billion |
| GAAP operating margin | 6.6% | (90.5%) | (1.4%) | (59.4%) |
| GAAP net margin | 1.9% | (75.6%) | (5.2%) | (50.4%) |
| Pre-tax loss excluding net special items | $(833) million | $(3.635) billion | $(5.761) billion | $(9.403) billion |
| Net cash from operating activities | Not separately disclosed | Not separately disclosed | $1.904 billion | $(3.680) billion |
Q3 passenger revenue was $7.957 billion, cargo revenue was $332 million and other revenue was $680 million. The passenger load factor was 78.7%, total revenue per available seat mile was 14.68 cents and total operating cost per available seat mile was 13.70 cents. Excluding fuel and net special items, CASM was 12.24 cents.
Liquidity, debt and balance sheet
- Total available liquidity at September 30, 2021 was $17.9 billion, comprising approximately $14.5 billion of unrestricted cash and short-term investments, $2.8 billion of undrawn revolving capacity and $570 million of other undrawn facilities.
- AAG reported $38.3 billion of long-term debt, including $2.4 billion of current maturities, compared with $32.8 billion at December 31, 2020. Net long-term debt after discounts and current maturities was $35.5 billion.
- Total stockholders’ deficit was $7.437 billion at September 30, 2021, compared with $6.867 billion at year-end 2020.
- During the first nine months, AAG issued approximately $10.0 billion through the AAdvantage financing, issued $460 million of common stock, received $3.5 billion of PSP2 assistance and $3.3 billion of PSP3 assistance, and repaid or terminated several facilities, including the $550 million Treasury term loan and the $950 million spare-parts term loan.
- Debt agreements generally require minimum liquidity of at least $2.0 billion and include collateral, loan-to-value and debt-service coverage requirements. Management stated that it expects to meet cash obligations and remain compliant with debt covenants for the next 12 months based on current assumptions.
Material changes versus the prior comparable periods
- Revenue recovery was substantial: Q3 revenue increased $5.796 billion from Q3 2020, while nine-month revenue increased $7.146 billion, driven principally by domestic and short-haul international leisure demand.
- Capacity nearly doubled year over year in Q3, with available seat miles up 98.6%; however, capacity remained 19.4% below Q3 2019 levels. Domestic capacity was 4.7% below 2019 and international capacity was 45.9% below 2019.
- Q3 operating results improved to operating income of $595 million from an operating loss of $2.871 billion. However, excluding special items, the company still reported an $833 million pre-tax loss.
- Fuel expense rose $1.341 billion in Q3, reflecting an 88.5% increase in consumption and a 69.3% increase in the average fuel price to $2.07 per gallon. AAG had no fuel hedging contracts outstanding.
- Nine-month operating cash flow improved by $5.584 billion, from a $3.680 billion use in 2020 to $1.904 billion provided in 2021, aided by government payroll support and higher air traffic liabilities as bookings recovered.
- Special items included $4.162 billion of PSP2 and PSP3 financial assistance recognized in the first nine months, partially offset by severance and other charges. The prior-year period included significant fleet impairment and severance charges.
Guidance, outlook, commentary and risks
- Management expected Q4 2021 system capacity to be 11% to 13% below Q4 2019 levels. No formal revenue or earnings guidance was provided.
- Management estimated more than $1.3 billion of 2021 permanent non-volume cost reductions and efficiency savings, including approximately $600 million in labor productivity enhancements, $500 million in management salaries and benefits, and $200 million of other reductions.
- COVID-19 remained the principal uncertainty. New variants, travel restrictions, vaccination outcomes, customer behavior and the pace of international recovery could materially affect revenue, liquidity and operating capacity.
- The Department of Justice, joined by multiple states and the District of Columbia, filed an antitrust complaint in September 2021 concerning the Northeast Alliance with JetBlue. A related Department of Transportation proceeding was stayed pending the DOJ action. The company believes the complaint is without merit, but the outcome and potential financial or operational effects are uncertain.
- Other material risks include high leverage, future aircraft and engine commitments, fuel-price volatility, interest-rate and LIBOR transition risk, labor negotiations and pilot shortages, credit-card processor holdbacks, regulatory restrictions, cybersecurity incidents and international operating risks.
- AAG had commitments for 184 aircraft deliveries, including 36 in 2022 and 28 in 2023. Total contractual obligations were approximately $91.9 billion, including debt, interest, leases, aircraft purchases and regional capacity commitments.
- Payroll support restrictions prohibit common-stock repurchases and dividends through at least September 30, 2022 and restrict certain executive compensation through 2023. AAG also issued Treasury warrants for up to approximately 11.0 million shares under PSP2 and PSP3.
Important facts investors should verify
- Whether the improvement in reported profitability is sustainable without recurring government payroll-support credits and other special items.
- The pace of recovery in international capacity, passenger demand, yields and load factors relative to 2019 levels.
- Liquidity after debt service, aircraft deliveries, lease payments, pension and postretirement obligations, and potential credit-card processor collateral requirements.
- The impact of higher fuel prices and the company’s continued decision not to hedge fuel consumption.
- Progress and potential remedies in the DOJ’s Northeast Alliance antitrust litigation.
- Compliance with the $2.0 billion minimum liquidity requirement and other collateral and debt-service covenants.
- Potential dilution from Treasury warrants, convertible notes, employee awards and future capital raises.