Business Context and Reporting Period
American Airlines Group Inc. (AAG), together with wholly owned American Airlines, Inc., filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company operates a large global passenger airline, cargo business, regional capacity network and AAdvantage loyalty program.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total operating revenue | $13.482 billion | $13.462 billion | $39.726 billion | $35.783 billion |
| Operating income (loss) | $(223) million | $930 million | $2.378 billion | $225 million |
| Operating margin | (1.7%) | 6.9% | 6.0% | 0.6% |
| Net income (loss) | $(545) million | $483 million | $803 million | $(676) million |
| Diluted EPS | $(0.83) | $0.69 | $1.16 | $(1.04) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $5.154 billion | $2.331 billion |
- Q3 passenger revenue was $12.421 billion, essentially flat year over year. Revenue passenger miles increased 5.2%, while passenger yield declined 4.8% and load factor decreased 1.3 percentage points to 84.0%.
- Q3 cargo revenue declined 30.9% to $193 million, while other revenue increased 10.4% to $868 million, primarily reflecting higher loyalty-program revenue.
- Q3 fuel expense fell 16.6% to $3.209 billion as the average fuel price declined 22.0% to $2.91 per gallon, partly offset by a 6.9% increase in fuel consumption.
- Q3 salaries, wages and benefits increased 17.4% to $3.974 billion. Maintenance expense rose 26.9% to $870 million.
- Q3 total operating cost per available seat mile increased 2.3% to 18.70 cents. CASM excluding special items and fuel increased 3.3% to 13.02 cents.
- Excluding $1.052 billion of pre-tax net special items, Q3 pre-tax income was $362 million versus $640 million in the prior-year quarter.
- At September 30, AAG reported $10.582 billion of cash and short-term investments, including $577 million of cash and $10.005 billion of short-term investments. Total available liquidity was $13.450 billion, including $2.868 billion of undrawn facilities.
- AAG reported $33.277 billion of long-term debt before discounts and issuance costs, including $3.607 billion of current maturities. Total stockholders’ deficit was $5.136 billion.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased 11.0%, led by a 12.5% increase in passenger revenue. RPMs increased 8.3%, yield increased 3.9% and load factor improved 1.0 percentage point to 83.5%.
- Nine-month operating income increased to $2.378 billion from $225 million, and net income improved to $803 million from a $676 million loss. The improvement reflected stronger passenger demand and lower fuel prices, partly offset by higher labor, maintenance and operating costs.
- Nine-month operating cash flow increased $2.823 billion to $5.154 billion, driven by the return to profitability and working-capital changes.
- Debt and finance-lease payments totaled $4.624 billion during the first nine months, partly offset by $2.324 billion of new long-term debt proceeds. AAG also repurchased $552 million of secured and unsecured notes.
- AAG issued $750 million of 7.25% senior secured notes due 2028 and extended the maturity of $1.0 billion of term loans under the 2013 Term Loan Facility. Substantially all LIBOR-based facilities were transitioned primarily to SOFR.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide a clear formal earnings or revenue guidance range. Management emphasizes continued exposure to demand, fuel prices, labor costs, interest rates and economic conditions.
- The main unusual item was $983 million of labor-contract expense related to ratification of the four-year mainline pilot agreement, including a $754 million one-time payment and $229 million of benefit-related adjustments. The agreement includes an initial 21% wage-rate increase effective January 1, 2023. Most related payments were made in October 2023, with remaining payments expected in the first quarter of 2024.
- The pilot agreement also increased the postretirement benefit obligation by $339 million, recorded in accumulated other comprehensive loss.
- The Northeast Alliance with JetBlue was permanently enjoined by a federal court. The companies are winding down the arrangement, and American appealed the decision in September 2023. Consolidated private antitrust actions remain pending.
- American had no fuel-hedging contracts outstanding and generally does not hedge fuel consumption. Management estimates that a one-cent-per-gallon fuel-price increase would increase 2023 annual fuel expense by approximately $40 million.
- Key risks include substantial leverage, variable-rate debt, minimum liquidity and collateral covenants, aircraft and engine purchase commitments, labor-cost inflation, pilot and other staffing shortages, fuel volatility, aircraft-delivery delays, regulatory and antitrust actions, cybersecurity incidents, weather and geopolitical disruptions, and competitive pressure.
- AAG’s contractual obligations totaled approximately $87.3 billion, including $28.0 billion of American debt principal, $12.7 billion of aircraft and engine purchase commitments, $11.0 billion of operating lease commitments and $8.5 billion of regional capacity-purchase commitments.
- Management reported that AAG and American’s disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the higher pilot compensation structure and other pending labor agreements produce sustained increases in CASM and constrain profitability.
- The timing and funding of $3.6 billion of current debt maturities and the company’s ability to maintain required minimum liquidity and collateral coverage.
- Fuel-price sensitivity, given the absence of fuel hedges and the company’s full exposure to market prices.
- The outcome of American’s appeal and the potential financial or operational effects of the Northeast Alliance litigation and private antitrust claims.
- Aircraft delivery schedules, financing availability and the execution of approximately $12.7 billion of aircraft and engine commitments.
- The sustainability of passenger demand, loyalty-program cash generation and revenue performance as capacity expands and yields normalize.
- Potential effects of pilot shortages, aircraft supply-chain delays, maintenance requirements, regulatory changes and cybersecurity or operational disruptions.