Lower Unit Revenues, Higher Tax Provisions Weigh On American Airlines’ Q2’16 Results

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Continuing the downtrend from Q1’16, American Airlines’ (NASDAQ:AAL) revenues as well as earnings dropped notably in the June quarter. The airline’s unit revenues (PRASM) declined sharply due to macroeconomic weakness, and competitive capacity growth, causing its revenues to fall by 4% y-o-y. However, the legacy carrier practiced strict fiscal discipline, successfully lowering its operating expenses by 2.6% y-o-y, despite slightly higher fuel prices and contractual labor rate increases. In terms of bottom-line, net income was down by almost 45%, primarily due to the recognition of a provision for income tax that was not carried out in the same quarter last year. However, this provision is a non-cash item since it is likely to be set off in the future against non-operating losses (NOLs) accumulated by the airline in the past.

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Going Forward

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At the end of Q1’16, American Airlines had revised its full year capacity guidance down from 3% to 2.5% to manage its declining unit revenue. The company mentioned in its Q2’16 earnings call that there is an ongoing disconnect between the pace of demand growth and capacity growth, which continues to put pressure on its unit revenues. Hence, the carrier announced a further cut in its 2016 capacity guidance by half a percentage point to 2%. Further, American expects its third quarter fuel prices to average at $1.45- $1.50 per gallon, slightly higher than the June quarter due to the rising crude oil prices. In terms of non-fuel costs, the legacy carrier expects these costs to climb up in the range of 4% – 6% in FY 2016. As a result, the company expects a contraction in its pre-tax margins.

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Have more questions about American Airlines (NYSE:AAL)? See the following links:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for American Airlines

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