American Airlines Q3’16 Earnings Review: Unit Revenues Improve, But Costs Increase
Continuing the downtrend seen in consecutive quarters now, American Airlines (NASDAQ:AAL) saw its revenues fall slightly in its Q3’16 earnings, reported on 20th October 2016. However, the decline in revenues was less than anticipated, despite continued weakness in unit revenues in the Pacific and Atlantic region, pushing the stock price of the carrier higher post earnings release.
On the expense side, the significant increase in unit costs more than offset the gains made from fuel savings, causing operating income to fall by over 5 percentage points. The increase seen in operating expenses is primarily attributable to the new labor contract at American which has resulted in higher wages and profit sharing plan. Further, due to the higher tax liability in the quarter, its earnings per share came in much lower on a comparable basis. 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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The company returned approximately $4.2 billion back to its equity owners so far in the year in the form of share buybacks and dividend payments, providing value to the shareholders. Moreover, the company continued to pare off the debt built on its balance sheet.
As mentioned above, American’s unit revenues improved as the decline in unit revenues was curtailed to -3.3%. This is attributable to the positive passenger yields seen in Latin America due to the improvement in Brazil’s economy, and significant advancements in domestic markets. This decline in PRASM is much lower than the other legacy carriers, United (-5.8%) and Delta (-6.8%), and likely stems from the capacity reductions undertaken by American. To continue the momentum seen in unit revenues, the company has revised its capacity guidance downwards for the full year of 2016 to 1.5%, while it expects the fourth quarter capacity to stay flat. Moreover, it hopes to curtail 2017 capacity to only 1% y-o-y, as it tries to turn around its unit revenues. This is in sharp contrast to Alaska, which plans to grow by capacity expansion in the high single digits.
American Airlines non-fuel costs are expected to increase by as much as 8%-10% in the last quarter of the year, as the full impact of the labor agreement starts being felt. This, together with increasing oil prices, will lower the company’s pre-tax margins consequently. However, in 2017, American’s recent labor contract is expected to add only slightly to costs, which are expected to be up 2 percentage points.
Have more questions about American Airlines (NYSE:AAL)? See the following links:
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- US Airlines: A Comparison Of Operating Margins
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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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