American Airlines Group Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
American Airlines Group Inc. (AAG), together with wholly owned American Airlines, Inc., filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Results remained significantly affected by COVID-19, although domestic and Latin American leisure demand improved materially from the 2020 trough. Second-quarter capacity was 24.6% below the comparable 2019 level; domestic capacity was down 12.8% and international capacity was down 46.5% versus 2019.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Total operating revenue | $7.478 billion | $11.486 billion |
| Operating income (loss) | $441 million | $(874) million |
| Income (loss) before taxes | $9 million | $(1.564) billion |
| Net income (loss) | $19 million | $(1.231) billion |
| Operating margin | 5.9% | (7.6)% |
| Net margin | 0.3% | (10.7)% |
| Operating cash flow | Not separately provided | $3.644 billion |
Second-quarter passenger revenue was $6.545 billion, cargo revenue was $326 million, and other revenue was $607 million. Passenger load factor was 77.0%, PRASM was 12.00 cents, TRASM was 13.71 cents, and total CASM was 12.90 cents. CASM excluding net special items and fuel was 12.61 cents.
For the six months, passenger revenue increased 10.7% to $9.724 billion, while TRASM declined 2.8% to 12.44 cents and passenger yield declined 10.1%. The company reported $3.644 billion of operating cash flow, compared with $(1.076) billion in the prior-year period; approximately $4.7 billion of cash proceeds in 2021 were associated with payroll support financial assistance.
At June 30, 2021, AAG had $21.263 billion of total available liquidity, comprising $325 million of cash, $17.625 billion of short-term investments and $3.313 billion of undrawn facilities. Restricted cash and short-term investments totaled $999 million. Long-term debt, including current maturities, was $39.917 billion, compared with $32.770 billion at December 31, 2020. Current maturities were $2.692 billion, and total stockholders’ deficit was $7.667 billion.
Material changes versus prior comparable periods
- Second-quarter revenue increased $5.856 billion from $1.622 billion, driven primarily by the recovery in passenger traffic; passenger revenue increased $5.437 billion.
- Second-quarter net income improved to $19 million from a $2.067 billion net loss. However, excluding net special items, pre-tax loss was still $1.409 billion versus $4.320 billion in the prior-year quarter.
- Six-month revenue increased 13.3% to $11.486 billion, but the company remained loss-making, with a $1.231 billion net loss versus a $4.308 billion loss in the prior-year period.
- Six-month operating expenses declined 18.5% to $12.360 billion, primarily because operating special-item credits increased by approximately $2.9 billion. Excluding operating special items, expenses increased modestly despite a 16.6% increase in capacity.
- Fuel expense increased 26.4% in the first six months to $2.644 billion. The average fuel price rose to $1.82 per gallon from $1.68.
- Debt increased substantially following the $10.0 billion AAdvantage financing, consisting of $3.5 billion of 5.50% senior secured notes, $3.0 billion of 5.75% senior secured notes and a $3.5 billion term loan facility.
- The company issued $460 million of common stock through an at-the-market offering and repaid $2.8 billion of revolving borrowings and $550 million of Treasury term loans.
Guidance, outlook, commentary and unusual items
- Management expected third-quarter 2021 system capacity to be 15% to 20% below the third quarter of 2019, subject to further adjustments based on booking trends.
- Management estimated more than $1.3 billion of 2021 permanent non-volume cost reductions and efficiency measures, including approximately $600 million of labor productivity enhancements, $500 million of management salary and benefit reductions and $200 million of other reductions.
- Management expected to meet cash obligations and remain in compliance with debt covenants for the next 12 months based on current liquidity, anticipated financing access and projected operating cash flow. This expectation depends materially on uncertain COVID-19 and travel-demand assumptions.
- Operating special items included $1.455 billion of second-quarter credits and $3.377 billion of six-month credits, primarily from recognition of PSP2 and PSP3 payroll support assistance. The six-month amount also included $168 million of severance expense and $27 million of fleet impairment.
- During the first six months, the company received approximately $3.5 billion under PSP2 and approximately $3.3 billion under PSP3. In connection with these programs, it issued promissory notes of $1.0 billion and $946 million, respectively, and warrants for approximately 6.6 million and 4.4 million shares.
- Government assistance restricts stock repurchases and common dividends through at least September 30, 2022, restricts certain executive compensation through 2023, and imposes employee, reporting and service obligations.
- The company had no fuel hedging contracts and remained fully exposed to fuel-price changes. Management estimated that a one-cent-per-gallon increase would raise 2021 fuel expense by approximately $34 million.
- On July 22, 2021, after quarter-end, American repaid and terminated the $950 million April 2016 Spare Parts Term Loan Facility.
Principal risks and contingencies
Key risks include renewed COVID-19 outbreaks, variants or travel restrictions; uncertain recovery in international and business travel; high leverage and substantial aircraft, lease, pension and other contractual obligations; fuel-price volatility; unhedged variable-rate debt and LIBOR replacement risk; potential credit-card processor holdbacks; labor negotiations and pilot shortages; regional-carrier and supplier disruptions; cybersecurity and technology failures; regulatory and antitrust proceedings involving alliances; climate and environmental costs; and potential impairment of aircraft, goodwill or other intangible assets.
As of June 30, 2021, AAG had approximately $16.5 billion of federal NOL carryforwards and $5.0 billion of state NOL carryforwards. Their utilization depends on future taxable income and may be limited by Section 382 or other restrictions.
Investor verification checklist
- Verify the sustainability of operating cash flow excluding payroll support assistance and the timing of future government-support recognition.
- Reconcile reported liquidity with restricted cash, minimum liquidity covenants and potential credit-card processor holdbacks.
- Review the maturity schedule, interest burden and collateral requirements for approximately $39.9 billion of AAG debt.
- Assess whether capacity, load factor, yield and TRASM trends support a sustainable return to profitability after special items.
- Evaluate exposure to unhedged fuel prices, variable interest rates and the transition from LIBOR.
- Monitor compliance with PSP restrictions, including dividend, repurchase, compensation and employee-related requirements.
- Review aircraft purchase commitments, lease obligations, regional capacity commitments and expected cash payments under early-retirement programs.
- Track pending antitrust appeals, the JetBlue alliance investigations, cybersecurity matters and other legal proceedings whose ultimate impacts remain uncertain.