American Airlines Group Inc. — 2Q23 Form 10-Q Summary
Business Context and Reporting Period
American Airlines Group Inc. (AAG) and wholly owned subsidiary American Airlines, Inc. filed unaudited Form 10-Q reports for the quarter and six months ended June 30, 2023. Results primarily reflect scheduled passenger airline operations, regional capacity purchase agreements, cargo, and the AAdvantage loyalty program.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 |
|---|---|---|
| Total operating revenue | $14.055 billion | $26.244 billion |
| Operating income | $2.163 billion | $2.600 billion |
| Operating margin | 15.4% | 9.9% |
| Pre-tax income | $1.763 billion | $1.779 billion |
| Net income | $1.338 billion | $1.348 billion |
| Net margin | 9.5% | 5.1% |
| Diluted EPS | $1.88 | $1.91 |
| Net cash from operating activities | Not separately provided for the quarter | $5.096 billion |
Passenger revenue was $12.978 billion in the second quarter and $24.081 billion for the first six months. Cargo revenue was $197 million and $420 million, respectively. Other revenue was $880 million and $1.743 billion, including loyalty marketing revenue of $741 million and $1.463 billion.
Second-quarter total operating expenses declined 4.1% to $11.892 billion, primarily because fuel expense decreased 32.3% to $2.723 billion. Salaries, wages and benefits increased 12.4% to $3.635 billion, while maintenance expense increased 24.9% to $808 million. Six-month operating expenses increased 2.7% to $23.644 billion.
Fuel averaged $2.62 per gallon in the second quarter, down 35.1% year over year. The company had no fuel hedging contracts outstanding at June 30, 2023. Second-quarter CASM was 17.07 cents, compared with 18.75 cents in the prior-year quarter; CASM excluding fuel and special items increased to 13.16 cents from 12.68 cents.
Liquidity, Debt and Balance Sheet
- Total available liquidity at June 30, 2023 was $14.924 billion, comprising $614 million of cash, $11.447 billion of short-term investments and $2.863 billion of undrawn facilities. Restricted cash and short-term investments were $984 million.
- AAG reported $34.442 billion of long-term debt, including current maturities, compared with $35.289 billion at December 31, 2022. Current maturities were $3.717 billion.
- Total stockholders’ deficit was $4.385 billion, improved from a deficit of $5.799 billion at year-end 2022.
- Air traffic and loyalty program liabilities totaled $17.906 billion at June 30, 2023, up from $15.890 billion at December 31, 2022.
- AAG had $1.244 billion of capital expenditures in the first six months, primarily for aircraft and spare engines, and made net debt and finance lease payments of approximately $1.1 billion.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased 4.7%, led by a 6.2% increase in passenger revenue. Revenue passenger miles rose 4.4%, while passenger yield increased 1.7%.
- Six-month revenue increased 17.6%, with passenger revenue up 20.2%. Revenue passenger miles increased 10.0%, passenger yield increased 9.2%, and passenger load factor improved 2.2 percentage points to 83.2%.
- International demand was particularly strong, including an 18.2% increase in Atlantic-region second-quarter RPMs. Cargo revenue declined 39.8% in the quarter and 39.2% year to date because of lower cargo yield and demand.
- Second-quarter net income increased from $476 million to $1.338 billion; six-month results improved from a $1.159 billion net loss to $1.348 billion of net income.
- Interest expense increased 17.1% in the quarter and 16.8% year to date, primarily because of higher rates on variable-rate debt. Interest income increased substantially because of higher returns on short-term investments.
- Operating special items were $19 million for the first six months of 2023 versus $152 million in the prior-year period, which included a $149 million non-cash fleet impairment charge.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear quantitative earnings or revenue guidance range. Management attributed the improved results to strong passenger demand, especially long-haul international demand, and lower fuel prices, while noting continued pressure from labor, maintenance, airport, regional and other operating costs.
- American and the Allied Pilots Association reached a tentative collective bargaining agreement after quarter-end. If ratified, it includes an approximately $750 million one-time payment and other benefit-related costs. No accrual was recorded at June 30 because ratification remained uncertain.
- The company expects significant future capital needs. Aircraft and engine purchase commitments totaled approximately $12.651 billion through 2027, with 185 aircraft scheduled for delivery through 2027; delivery timing may change.
- Debt agreements generally require compliance with liquidity, collateral coverage, loan-to-value and debt service coverage requirements. The company reported compliance with applicable tests as of the most recent measurement dates and must generally maintain at least $2.0 billion of unrestricted cash and available revolver capacity.
- The Northeast Alliance with JetBlue is being wound down following a federal court injunction. JetBlue delivered a termination notice effective July 29, 2023, and American planned to appeal the final judgment. Related private antitrust actions remain pending.
- Key risks include economic weakness, fuel-price volatility, higher interest rates, substantial leverage, labor disruption and wage inflation, pilot and other staffing shortages, aircraft delivery delays, regional-carrier dependence, technology and cybersecurity incidents, regulatory changes, climate-related costs, international instability and litigation.
Important Facts for Investors to Verify
- Whether the pilot tentative agreement was ratified and the timing and total cost of the approximately $750 million payment and related benefits.
- Progress and financial or operational effects of the Northeast Alliance wind-down and associated antitrust appeals and private litigation.
- Aircraft delivery schedules, financing availability and the ability to fund approximately $12.651 billion of aircraft and engine commitments through 2027.
- Fuel prices, labor costs, maintenance costs and CASM excluding fuel, which rose despite lower reported total CASM.
- Debt maturities, variable-rate exposure, collateral and liquidity covenant compliance, including the $3.7 billion of current debt maturities.
- Whether passenger demand and international strength persist while cargo demand remains weak.
- Potential changes in deferred tax asset valuation allowances and the ability to use federal and state NOL carryforwards.