American Airlines Group Inc. – Form 10-Q Summary
Business context and reporting period
Combined unaudited quarterly report for American Airlines Group Inc. (AAG) and wholly owned subsidiary American Airlines, Inc., filed October 26, 2017, covering the three and nine months ended September 30, 2017. The company operated approximately 6,700 flights per day to nearly 350 destinations in more than 50 countries and carried approximately 51 million passengers during the third quarter.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total operating revenue | $10.878 billion | $10.594 billion | $31.606 billion | $30.391 billion |
| Operating income | $1.232 billion | $1.431 billion | $3.368 billion | $4.517 billion |
| Pre-tax income | $1.004 billion | $1.189 billion | $2.659 billion | $3.799 billion |
| Net income | $624 million | $737 million | $1.661 billion | $2.387 billion |
| Diluted EPS | $1.28 | $1.40 | $3.35 | $4.20 |
| Operating margin | 11.3% | 13.5% | 10.7% | 14.9% |
| Net margin | 5.7% | 7.0% | 5.3% | 7.9% |
- Passenger revenue increased 2.5% in Q3 and 3.4% for the first nine months. Cargo revenue increased 17.0% in Q3 and 12.2% year to date.
- Q3 consolidated TRASM increased 1.1% to 14.89 cents. Passenger yield rose 1.6%, while the consolidated load factor declined 0.5 percentage points to 82.8%.
- Q3 operating expenses increased 5.3%, outpacing the 2.7% revenue increase. Fuel expense increased 13.3% and salaries, wages and benefits increased 8.0%.
- Mainline CASM increased 3.5% to 12.37 cents in Q3; CASM excluding special items and fuel increased 4.8% to 9.77 cents. For the first nine months, mainline CASM increased 9.0% and adjusted CASM increased 7.0%.
- Pre-tax income excluding special items was $1.114 billion in Q3 versus $1.483 billion in the prior-year quarter, and $3.102 billion for the first nine months versus $4.298 billion in 2016.
- Net cash provided by operating activities was $4.307 billion for the first nine months, down from $5.897 billion in 2016. Capital expenditures and aircraft purchase deposits were $4.563 billion.
- At September 30, AAG held $340 million of cash, $5.428 billion of short-term investments and $393 million of restricted cash and short-term investments. Total available liquidity was approximately $8.3 billion, including $2.5 billion of undrawn revolving credit facilities.
- Long-term debt and capital lease obligations totaled $24.922 billion, including $2.467 billion of current maturities. AAG’s debt fair value was estimated at $25.681 billion.
- Stockholders’ equity was $3.948 billion, and pension and postretirement liabilities were $7.467 billion.
Material changes versus the prior comparable period
- Revenue growth was positive, supported by higher yields, strong demand, improved Latin American performance, higher cargo volume and increased loyalty-program revenue.
- Profitability weakened materially because higher fuel prices and labor costs more than offset revenue growth. Brent crude averaged approximately $52 per barrel versus $46 in Q3 2016, and the company’s average fuel price increased 13.3% to $1.67 per gallon.
- Year-to-date operating cash flow declined $1.6 billion, primarily because of lower profitability and a $256 million supplemental pension contribution.
- Special items declined to $110 million of pre-tax charges in Q3 from $294 million in Q3 2016. Year-to-date operating special items were $431 million versus $463 million.
- The company invested heavily in fleet renewal, acquiring or financing 58 aircraft during the first nine months, compared with 77 aircraft in the prior-year period.
- AAG repurchased 29.4 million shares for $1.3 billion during the first nine months and paid $150 million in dividends. Approximately $677 million remained under its authorized repurchase program at September 30.
Guidance, outlook, commentary, risks and unusual items
- Management’s stated liquidity objective was to maintain at least $7.0 billion of total available liquidity; liquidity at quarter-end was well above that level. No formal full-year earnings or revenue guidance is provided in the filing text.
- The company had no fuel hedging contracts outstanding and therefore remained fully exposed to fuel-price movements. Based on forecast consumption of approximately 4.4 billion gallons, a one-cent-per-gallon fuel-price increase would increase annual expense by approximately $44 million.
- Management identified labor-rate increases, fuel costs, competitive pricing and hurricane impacts as important drivers of operating performance. Higher wages reflected mid-contract increases for pilots and flight attendants and increased rates for maintenance and fleet-service employees.
- Revenue standard adoption was planned for January 1, 2018 using the full retrospective method. Management estimated a $5.5 billion increase in the loyalty-program liability, partly offset by a $2.0 billion deferred-tax-asset increase, producing an estimated $3.5 billion charge to retained earnings. It also estimated a $300 million increase in 2017 passenger revenue and pre-tax income, subject to change, with approximately $2.5 billion of ancillary revenue annually reclassified to passenger revenue.
- The company expected lease-accounting adoption on January 1, 2019 to materially increase recognized right-of-use assets and lease liabilities.
- Aircraft and engine purchase commitments totaled $14.608 billion for American, with 241 aircraft on order. Financing commitments were not in place for certain aircraft scheduled for delivery from late 2018 onward, creating future capital-raising needs.
- Key risks include fuel-price volatility, high leverage, variable-rate debt, rising pension obligations, the need to secure aircraft financing, competitive pricing and low-cost-carrier pressure, labor disruptions and pilot shortages, adverse economic or geopolitical events, severe weather, operational or technology disruptions, cyber risks, regulatory changes, foreign-currency exposure and material litigation.
- Pending matters include DOJ investigations and related class actions concerning alleged capacity coordination, a DOJ inquiry involving USPS mail contracts, and proceedings concerning retiree benefits. The company states that outcomes could be material but cannot currently be predicted.
- Subsequent to quarter-end, American issued approximately $193 million of 2016-3 Class B EETCs and approximately $221 million of 2017-2 Class B EETCs. A $0.10 per-share dividend was also declared for payment in November 2017.
Most important facts for investors to verify
- Whether revenue growth and yield improvement can offset fuel inflation, labor-rate increases and other unit-cost pressures.
- The sustainability of approximately $8.3 billion of available liquidity relative to $24.9 billion of debt, $14.6 billion of aircraft commitments and other contractual obligations.
- The final quantitative impact of the January 1, 2018 revenue-standard adoption, particularly the loyalty-program liability and retained-earnings adjustment.
- Future pension funding requirements, including the potential increase beginning in 2019.
- Availability and cost of financing for aircraft deliveries not yet covered by financing commitments.
- Potential financial, operational or reputational effects of the pending antitrust, USPS-contract and retiree-benefit proceedings.
- Exposure to unhedged fuel prices, interest rates, foreign currencies, labor actions, pilot availability and airline-industry competition.