American Airlines’ 3Q Profits Surge On Lower Fuel Costs, Announces Another Share Repurchase Program

American Airlines (NASDAQ:AAL), the world’s largest airline by traffic, posted a significant jump in its September quarter earnings, making it the highest quarterly profits in the history of the airline. This earnings growth is attributable to the declining fuel costs and the airline’s no-hedging policy. The airline’s stock went up by almost 4% on 22nd October 2015 ^[1]when the airline released its third quarter results.  However, the Fort Worth-based airline’s revenue declined due to the steep fall in its unit revenues during the last three months. The legacy carrier anticipates a weak unit revenue environment until mid-2016. Thus, we forecast that fuel cost savings will boost American’s bottom line, while falling unit revenue will continue to create a pressure on the airline’s top line over the next couple of quarters. In this article, we discuss the key highlights witnessed in American’s third quarter results and its guidance for the next quarter.

Our price estimate for American Airlines stands at $49 per share, 5% ahead of its current market price.

Source: Google Finance

Key Highlights of 3Q Results

• System capacity grew by 2.9% during the September quarter leading to an increase of 5.6% in the passenger traffic ^[2].
• Unit revenue, or passenger revenue per available seat mile (PRASM), fell 6.8% in the current quarter, which is well within the company’s initial guidance of a 6% to 8% decline.
• Revenue dropped to $10.7 billion, almost 4% lower compared to last year.
• Average fuel price was $1.67 per gallon during the quarter, representing a decline of 44% over the same quarter last year.
• Operating margin improved over 7% on a year-on-year basis to 18.7% due to fuel cost savings of $1.2 billion.
• Net profit (Non-GAAP) grew by close to 80% to $1.7 billion, translating into an EPS of $2.56 per share, almost double the earnings generated a year ago.

Returning Value To Shareholders

American Airlines generated an operating cash flow of $1.2 billion in the September quarter, which it used to pay down $714 million of its long-term debt. Further, the legacy carrier returned $1.63 billion to its shareholders in the form of dividends and share buy backs. In the third quarter, the airline paid $67 million in quarterly dividends and plans to pay a dividend of $0.10 per share in the last quarter. In addition, the network carrier repurchased of $1.56 billion of common stock, or 38.4 million shares. This means that the airline has repurchased 59.5 million shares for $2.5 billion in the first nine months of 2015. Apart from this, the airline’s Board of Directors authorized an additional $2 billion share repurchase program to be completed by December 31, 2016. This brings the total amount of share repurchase programs authorized in 2015 to $6 billion, the largest repurchase program being undertaken by any airline. While this aggressive buy back program will be helpful in reassuring the investors about the financial strength of the airline, it will enable the airline to further enhance its bottom line growth in the next few quarters.

See Our Complete Analysis For American Airlines Group Here

Outlook for 4Q and 2016

Given the strong domestic competition from smaller competitors such as Southwest and Spirit, American Airlines does not expect much improvement in the unit revenue conditions over the next quarter. Thus, the airline anticipates its unit revenue to decline by 5% to 7% in the December quarter. On the capacity front, the network carrier plans to grow its domestic capacity by 1% to 2%, while expanding its international capacity by approximately 4% to 6% in the next quarter, translating into an overall system capacity growth of approximately 1% for the full year. While the network carrier has not given a formal guidance for 2016 capacity growth, it is expected to be in the range of 2% to 3%.

Based on the current oil prices, the airline expects its fuel prices to average between $1.48 and $1.53 per gallon for mainline, and regional $1.51 to $1.56. For the full year, the consolidated fuel price is likely to be in the range of $1.70 to $1.75 per gallon. However, American Airlines estimates its unit costs (excluding fuel and special items) to go up by 3% to 5%, driven primarily by labor contracts covering the pilots and flight attendants. Keeping all this in mind, the airline is positive about its fourth quarter earnings and expects to generate pre-tax operating margin (excluding special items) between 12% and 14%. In terms of capital expenditures, the airline expects to spend approximately $5.3 billion in 2015, of which approximately $1.3 billion will occur in the fourth quarter.

 To sum it up, we believe that American Airlines’ no-hedge policy and aggressive share repurchase programs will drive its earnings growth for the next couple of quarters.

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1. American Airlines Announces 3Q Results, 23rd October 2015, www.aa.com [↩]
2. American Airlines Form 10-Q, 23rd October 2015, www.aa.com [↩]