Will American Airlines Continue Flying?

American Airlines (AAL) announced first quarter ended March 31, 2016 total operating revenue of $9.4 billion, down 4 percent year-over-year from $9.8 billion during the same period last year.

A closer look at the performance

American Airlines declared first quarter of 2016 adjusted net income of $1.22 billion or $1.99 per diluted share, slightly below its first quarter of 2015 adjusted net income of $1.24 billion or $1.73 per diluted share.

The key airline reported continued slight decline in both its top and bottom lines primarily due to greater product investments during the quarter coupled with ongoing macroeconomic weakness across Latin America and softness in foreign currency.

Net revenue for the quarter declined 4% despite a 3.6% expansion in consolidated available seat miles (ASMs) due to 7.1% year-over-year fall in total passenger yield to 15.62 cents.

Net operational expenditures during the first quarter were $8.1 billion, a decline of 5.9 percent over the same period last year primarily driven by a 32.7 percent fall in total fuel expenditures.
The core adjusted cost per available seat mile (CASM) for the quarter was recorded at 9.62 cents, a year-over-year increase of 1.4 percent compared to the first quarter of 2015 and due to a 3.1 percent growth in core ASMs for the period. Regional adjusted CASM was about 16.11 cents, a decline of 2.2 percent over an 8.1 percent expansion in regional ASMs compared to the first quarter 2015.

The global airlines primarily benefited from the continuing weaker international commodity demand and pricing environment including the poor fuel costs, delivering superior fuel cost savings for the company while allowing it to use these key savings for future growth while delivering attractive shareholder returns.

The total first quarter of 2016 passenger revenue per ASM (PRASM) was nearly 12.43 cents, a decline of 7.5 percent over the same period last year. Total passenger yield was illustrated as 15.62 cents, a year-over-year fall of 7.1 percent.

During the first quarter of 2016, American Airlines reported about $9.4 billion of consolidated available liquidity that includes key investments and unrestricted cash of approximately $2.4 billion and $6.9 billion of undrawn revolver capacity. American Airlines also illustrated controlled cash position of about $691 million.

American Airlines observed a notable year-over-year reduction in its top line growth per passenger mainly due to unfavorable foreign currency translations and key price reductions made by the company to capture market share.

Investing in the right areas

American Airlines is consistently making product investments that include key projects to improve airport boarding zones, major enhancements performed for premium cabin, in-flight connectivity, Flagship Lounges and the Admirals Club coupled with a significant and continued $3.0 billion obligation to enhance overall customer experience.

American Airlines is continuing to witness traffic expansion which is lagging capacity growth as the company is consistently increasing its year-over-year capacity. This increased capacity amid weaker traffic growth is believed to push company’s general expenses while pressuring its key margins.

American Airlines has continued to witness declining load factor with the company’s key factor reduced by 2.3% over the same period last year mainly due to reduced traffic numbers and significant capacity growth, putting downward pressure on the company’s load factor while indicating worsening aircraft capacity utilization.

The ongoing capacity expansion in addition to the declining airline traffic signifies that a majority of the airline’s seats are expected to remain unoccupied with nearly the same daily operational expenses, which is believed to negatively impact the company’s core profitability.

Conclusion

Overall, the investors are advised to “Hold” their position in American Airlines Group Inc. considering the company’s significant long-term growth prospects but the currently weaker financial position with a notable total debt of $21.74 billion against a weaker total cash position of $6.93 billion only, restricting the company from making future growth investments. The profit margin of 18.17% seems impressive. However, the PEG ratio of -0.32 appears misguiding and signifies no company growth but decline compared to the somewhat healthy industry’s growth average of 0.20.
Published on Jul 13, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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