AMR Corporation (American Airlines) — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
AMR Corporation, the parent of American Airlines and AMR Eagle, reported unaudited consolidated results for the three months ended March 31, 2011. This filing predates the formation of American Airlines Group Inc. and covers the predecessor AMR organization.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $5.533 billion | $5.068 billion | Up 9.2% |
| Operating expenses | $5.765 billion | $5.366 billion | Up 7.4% |
| Operating loss | $232 million | $298 million | Improved $66 million |
| Net loss | $436 million | $505 million | Improved $69 million |
| Basic and diluted loss per share | $1.31 | $1.52 | Improved |
| Operating margin | Approximately negative 4.2% | Approximately negative 5.9% | Improved |
| Net margin | Approximately negative 7.9% | Approximately negative 10.0% | Improved |
| Operating cash flow | $708 million | $456 million | Up $252 million |
- Passenger revenue increased to approximately $4.7 billion, while cargo and other revenue increased to $822 million.
- Mainline passenger unit revenue increased 5.0%; yield increased 6.2%, while the mainline load factor declined approximately 0.8 percentage points to 77.1%.
- Fuel expense rose $366 million, or 24.8%, to $1.842 billion. The average fuel price, including hedging, increased to $2.76 per gallon from $2.23.
- Fuel hedging reduced first-quarter fuel expense by approximately $101 million.
- At March 31, 2011, unrestricted cash and short-term investments totaled approximately $5.8 billion, and restricted cash and short-term investments totaled $455 million.
- Total debt, including current maturities, was $11.430 billion, up from $10.532 billion at December 31, 2010. Pension and postretirement liabilities were $7.926 billion.
- Stockholders’ deficit was $3.949 billion at March 31, 2011.
- Capital expenditures were $359 million; scheduled debt and capital lease payments were $323 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth and improved passenger yields reduced the operating and net losses, but much of the benefit was offset by sharply higher fuel costs.
- Capacity increased 2.7% for American mainline operations. International capacity rose 7.6%, while domestic capacity declined 0.2%.
- Operating expenses increased less than revenue, aided in part by a $46 million decline in maintenance expense, but fuel, aircraft rentals, and commissions, booking fees and credit-card expense increased.
- Operating cash flow improved substantially, reflecting higher current liabilities and increased hedge collateral held by the Company.
- Debt increased primarily because of a $1 billion senior secured notes issuance and other financing activity. First-quarter financing included approximately $1.7 billion of total financing, including a $657 million pass-through certificate offering and $1 billion of 7.5% senior secured notes due 2016.
- The first quarter of 2011 included approximately $31 million of non-recurring, non-cash sale-leaseback charges. The first quarter of 2010 included a $53 million Venezuelan currency devaluation charge.
Guidance, Outlook, Risks and Unusual Items
- Management expected second-quarter 2011 mainline capacity to increase approximately 2.9% year over year and full-year 2011 mainline capacity to increase approximately 2.2%, with domestic capacity down 0.5% and international capacity up 6.2%.
- Second-quarter 2011 mainline unit costs were expected to increase approximately 9.4% to 9.8% year over year.
- Based on its fuel forecast, the Company expected full-year 2011 fuel cost per gallon, including hedging, to increase approximately 33% from 2010. As of April 2011, hedges covered approximately 38% of estimated remaining 2011 fuel requirements.
- Management stated that high fuel prices were expected to materially and adversely affect operating results, cash flow and liquidity for the remainder of 2011, although the magnitude was uncertain.
- The Company estimated approximately $2.1 billion of long-term debt principal payments, $63 million of capital-lease principal payments and $1.3 billion of capital expenditures for the remainder of 2011. It stated that substantial additional funding would be needed and that access to financing on acceptable terms was not assured.
- 2011 minimum required pension contributions were estimated at approximately $520 million; $89 million was contributed during the first quarter and an additional $99 million was contributed on April 15, 2011.
- Almost all aircraft assets were encumbered, and AMR and American had credit ratings significantly below investment grade. Further rating reductions could increase borrowing costs and restrict financing availability.
- Credit-card processors were not requiring reserves at March 31, 2011, but future reserves could materially reduce liquidity if specified liquidity conditions were not met.
- The American-Japan Airlines joint business and revenue-sharing agreement began April 1, 2011. American provided a minimum-revenue guarantee capped at $100 million in each of the first three years; the potential payment was not estimable at filing.
- Disputes with Sabre, Travelport, Orbitz and Expedia regarding global distribution systems and direct-connect technology could reduce bookings, increase distribution costs or materially affect results. The Sabre stand-down agreement was scheduled to remain in effect through June 1, 2011.
- AMR continued evaluating a potential divestiture of AMR Eagle, but no transaction, timing or financial impact could be predicted.
- Aircraft purchase commitments required approximately $886 million of payments in the remainder of 2011, $1.2 billion in 2012 and additional payments through 2016. The Company also exercised rights for additional Boeing 777-300ER aircraft and maintained commitments for Boeing 787-9 aircraft, subject to confirmation rights.
Important Facts for Investors to Verify
- Whether revenue growth and fare increases can offset fuel inflation and rising unit costs.
- The Company’s ability to refinance or otherwise fund substantial debt maturities, aircraft commitments, pension contributions and operating obligations.
- Liquidity requirements under credit-card processing agreements, fuel-hedging collateral arrangements and debt covenants.
- Actual outcomes of the Sabre and Travelport litigation and the effect of distribution-channel disputes on bookings and revenue.
- The fair value and potential payment obligation associated with the JAL minimum-revenue guarantee.
- The status and economics of any proposed AMR Eagle divestiture.
- Exposure to litigation and antitrust claims, including cargo-related class actions and other pending proceedings.
- Future fuel prices, hedge coverage and the ability to maintain hedging activity if liquidity deteriorates.