Lower Oil Prices Boost American Airlines’ 1Q15 Profits
American Airlines Group (NASDAQ: AAL), which announced its first quarter results last week, reported a net profit (excluding special charges) of $1.2 billion for the March quarter, almost tripling the profit booked in the same quarter last year [1]. As a result, the Texas-based airline’s stock price jumped 2.4% to close the trading day at $52.70 per share. Despite posting disappointing traffic results earlier this month, the airline managed to earn a profit of $1.73 per share, exceeding the market estimate of $1.71 per share. American was able to take complete advantage of the depressed crude oil prices due to its policy of not hedging its fuel requirements, leading to a stellar performance during the otherwise weak first quarter.
We currently have a price estimate of $54 per share, about 4% ahead of its current market price.
See our complete analysis for American Airlines Group here
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Capacity Restraint Pulls Down 1Q Revenue
In tandem with the other legacy carriers such as United and Delta, American Airlines continues to adopt capacity discipline to fight the competitive capacity growth by low-cost carriers and other international airlines. Consequently, the airline’s flying capacity fell by close to 1% on a year-on-year basis, resulting in a drop in its passenger traffic of about 1.5% during the quarter [2]. The stronger US dollar and the weakness in the Latin American market further added to the pricing pressure in the market, forcing American’s load factor and unit revenue to decline by 0.4% and 1.7%, respectively, during the latest quarter [2]. Thus, the world’s largest airline by traffic recorded consolidated revenue of $9.83 billion [2], 1.7% lower than its revenue last year, however, slightly better than the analyst estimate of a 4% drop in revenue.
Lower Fuel Costs Drive Bottom-line Growth
Despite a decline in its top-line, American Airlines delivered a record first quarter on the back of weak crude oil prices that have led to an extraordinary performance by a majority of the US airlines. However, American benefited the maximum from the depressed oil prices as the airline decided not to hedge its fuel requirements post the merger with US Airways in 2013. As a result, the airline’s fuel costs declined by roughly 43% to $1.5 billion [2], reducing its overall operating expenses by 7.1% on a year-on-year basis. Hence, the legacy carrier generated an operating margin of 12.4%, in line with its previous guidance.
During the quarter, the airline returned $260 million to its shareholders by paying $70 million in quarterly dividends and buying back common stock worth $190 million. The airline also declared a dividend of 10 cents per share to be paid to the shareholders in May 2015 [2].
Integration Update
American Airlines achieved several critical integration milestones during the quarter, including a combined frequent flyer program and recalibration of the schedule at its hubs at Chicago O’Hare and Dallas/Fort Worth. The airline also obtained a single operating certificate from the Federal Aviation Administration (FAA) in early April, which will allow the two airlines to operate under a single call sign – AAL. However, the consolidation of the reservation system is not expected to be complete before 4Q15, which means that the revenue synergies from the merger will reflect only in the next year. Eventually, the planes operated by US Airways will also be repainted to sport American Airlines’ colors and logo.
Outlook
For the second quarter, American Airlines expects its average fuel price to be $1.84-$1.89 per gallon [2]. Hence, the airline forecasts its pre-tax margin (excluding special charges) to be 18-20% during the second quarter driven by low fuel costs [2]. Based on the market forecast, the airline is expected to report a net profit of $3.20 per share in the second quarter.
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