2015 Earnings Review: American Airlines’ Earnings Surge Due To Lower Fuel Costs, Despite A Fall In Top Line
American Airlines (NYSE:AAL), the world’s largest airline by traffic, reported extraordinary earnings for 2015 on the back of depressed fuel costs, making it the best year in the history of the airline [1]. The airline witnessed a notable expansion in its margins as it enjoyed the full benefit of the lower fuel costs due to its no-hedge policy. However, its unit revenue declined due to currency headwinds and higher competition, dragging down its revenue. Additionally, the airline completed its integration with US Airways during the year by merging its frequent flyer program, obtaining a single operating certificate, and migrating reservation systems. Going forward, we expect the airline to realize operational efficiencies from the merger, which will boost its bottom line, apart from the positive impact of the plummeting fuel costs [2]. Let’s take a quick look at the key trends seen in American Airlines’ latest earnings release.
Source: Google Finance
Weak Unit Revenue Pulls Down Revenue
- Should You Pick American Airlines Stock At $14 After A 6% Fall In A Week?
- With 20% Gains This Month Is Alaska Air A Better Pick Than American Airlines Stock?
- Which Airlines Stock Will Offer Better Returns – American Or United?
- What To Expect From American Airlines’ Q2?
- Will American Airlines Stock Recover To Its Pre-Inflation-Shock Level?
- Pick Either American Airlines Stock Or Its Peer – Both May Offer Similar Returns
With the fear of returning to the old days of pricing wars, American followed capacity discipline during the year, growing its capacity by only 1.2% on a year-on-year basis. This helped the Fort Worth-based airline to increase its passenger traffic 2.4% and improve its load factor (occupancy rate) by 100 basis points to 83%. However, the network carrier’s international operations were severely hit by the currency fluctuations during the year. Further, the rising competition from smaller and low-cost US airlines, along with Gulf carriers, led to pricing pressure for the airline. Consequently, the airline’s unit revenue dropped 5.4% in 2015 compared to 2014, which resulted in a notable decline in its top line. American’s 2015 revenue stood at $40.9 billion, almost 4% lower compared to the previous year.
No-Hedge Policy Drives Bottom Line
The plunge in crude oil prices over the last 18 months resulted in huge fuel cost savings for most of the airlines worldwide. However, unlike its competitors, American does not hedge its fuel consumption. As a result, the legacy carrier could receive the full benefit of plummeting oil prices. The airline’s fuel price averaged at $1.72 per gallon, almost 41% lower on a year-on-year basis. Consequently, the airline posted operating income of $6.2 billion, 46% higher compared to 2014, causing a margin expansion of 5% points during the year.
Returning Value To Shareholders
The notable reduction in fuel costs led to a steep rise in American’s cash flows in 2015. The company used these cash flows to finance its fleet renewal program by investing more than 5.3 billion in new aircraft. The network carrier took delivery of 75 new mainline aircraft while retiring 112 aircraft, making its fleet the youngest and most modern fleet in the US airline industry. The airline aims to continue this program in 2016-2017 by spending $4.5 billion on the delivery of 44 new mainline aircraft and 49 regional aircraft. In addition, American returned 3.9 billion to its shareholders during the year, of which $3.6 billion was spent on repurchasing 85.1 million shares. Overall, the airline ended the year with $8.7 billion in available liquidity, which is higher than is required to operate the airline. Going forward, the airline aims to maintain a liquidity of at least $6.5 billion, leading the industry’s liquidity levels.
See Our Complete Analysis For American Airlines Here
Going Forward
In order to maintain the equilibrium of seats in the market, legacy carriers are likely to restrict their capacity growth in 2016. In line with this expectation, American Airlines plans to grow its full year 2016 capacity by 3% compared to 2015. On the revenue front, the network carrier estimates its unit revenue to remain depressed even in the first quarter of 2016, experiencing a decline of 6%-8% on a year-on-year basis. Consequently, we expect the airline’s revenue to witness softness in the coming quarter. However, on the cost side, American will continue to enjoy huge fuel cost savings, as the outlook for the oil price market remains challenging. The airline anticipates its fuel price to average in the range of $1.15 and $1.20 per gallon for the March quarter, and $1.20 to $1.25 per gallon for the full year 2016. Overall, the airline expects its first quarter pre-tax margin (excluding special items) to be between 12% and 14%.
In conclusion, we believe that American Airlines will continue to fly high on the back of lower fuel costs and operational efficiencies from the merger, despite the pricing pressure from currency headwinds and stiff competition.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Notes:- American Airlines Announces 2015 Results, 29th January 2015, www.aa.com [↩]
- American Airlines 2015 Earnings Transcript, 29th January 2015, Seeking Alpha [↩]