American Airlines Remains Focused On Completing The Integration Process, Pacific To Drive Future Growth

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American Airlines, the world’s largest airline by traffic, is concentrating all its efforts (including a large amount of cash) to achieve the final milestone in the integration process of its merger with US Airways that took place in December 2013. This was the message that was conveyed by the airline’s Chief Financial Officer (CFO), Derek Kerr, who presented at the Cowen and Company’s 8th Annual Global Transportation Conference last week. While Mr. Kerr painted an optimistic picture about its third quarter performance and the airline’s operations in general, the key takeaway from the presentation was the fact that the airline expects a majority of its future growth to be driven by the Pacific region. The general tone of the presentation was very positive and the airline appeared comfortable with its current performance, despite the recent tremors felt by the global markets. We believe that the airline is on track for meeting the deadline of operating a single passenger service system (PSS) and is set to deliver another record quarter on the back of lower crude oil prices.

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Source: Google Finance

Here are the key highlights of the presentation:

  • Integration On Track For Completion – American Airlines has completed four out of the five major milestones that the airline had identified in the integration process. The last step in the process, which comprises the integration of operations of American Airlines and US Airways on a single passenger service system (PSS), is expected to be completed by 17th October 2015. The airline used the “drain down” approach, under which the airline migrated all the reservations for US Airways flights to American flights for departures on and beyond 17th October to its existing system called Sabre on 18th July 2015. Post the cutoff date, all US Airways flights will cease to exist and passengers will be able to book flights for both the flights on a single reservation system. The Fort Worth-based airline is providing extensive training to its customer facing employees and has hired additional staff to ensure a smooth transition.
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  • 3Q Expectations High – American Airline delivered its highest ever quarterly profit of $1.9 billion in the last quarter, despite challenging weather conditions. The airline generated a pretax operating margin of 17.2% in the second quarter, which is substantially higher than the other network carriers such as United and Delta. The legacy carrier expects to repeat its 2Q performance in the third quarter on the back of weak fuel prices and better operational performance.

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  • High Liquidity – The legacy carrier had a liquidity of approximately $11.5 billion, which is very high compared to its peers. However, the airline specified that it has maintained a high liquidity to ensure a hassle free transition into a single PSS next month. Consequently, the airline’s liquidity is expected to reduce significantly in 2016, closer to the average liquidity of other network carriers.

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  • Youngest Fleet By 2017 – American is investing heavily on its fleet replacement program. The airline is expected to receive 87 A320 family aircraft over the next two years and over 100 A320 Neo aircraft beyond 2018. As a result, the airline will have the youngest and most fuel efficient fleet in the industry by 2017. The airline’s average fleet age in 2017 is expected to be 9.6 years, which is at least 3 to 4 years lower compared to its competitors.

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  • Latin American To Remain Weak; Pacific To Drive Future Growth – The network carrier expects Latin American markets, particularly Brazil, to remain rough even in the second half of the year. However, the airline sees a majority of its future growth to be driven by the Pacific markets, even though the airline does not have a significant presence in those markets yet.

Overall, American Airlines is extremely confident about migrating into a single passenger reservation system by mid-October and is looking forward to record third quarter results to be announced next month.

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