American Airlines (NYSE:AMR) reported yet another quarter of losses as it disclosed financial results for the third quarter of 2011 last week. Despite healthy unit revenue growth, fuel headwinds spoiled the party causing the airline to end the quarter with $162 million in net losses. Bankruptcy fears have also temporarily distracted the carrier as it looks capable of meeting its capital expenditure and debt repayment needs in the near term with its unrestricted cash reserves and financing arrangements. However, uncertainty over AMR’s long term position still looms as labor contracts still remain an unresolved issue placing it at a disadvantage vis-a-vis peers Delta Airline (NYSE:DAL) and United Continental (NYSE:UAL). Below, we take a look at the key highlights of American’s third quarter results as well as the trends that they outline for the remaining year.
We have a revised price estimate of $6.20 for American Airlines as we factor in a higher cost of debt for the airline due to heightened bankruptcy fears as well as the impact of the fuel cost savings expected from the massive fleet order placed with Boeing and Airbus, this July.
Boosted by Latin America Flying, Top-Line Growth Remains Strong
American was able to grow consolidated passenger unit revenues by 8.7% this quarter, y-o-y, driven primarily by Latin America flying and the domestic markets. Latin America is the largest international entity for American and home to Miami International Airport, which is the airline’s second-largest hub after its home base at Dallas-Fort Worth International Airport. Strong yields (revenue per revenue seat mile) and load factors resulting from pricing initiatives and capacity cuts in the region held it as a major contributor to American’s top-line growth. The airline feels reasonably confident about the revenue environment heading into the winter.
Trans-Atlantic Joint Ventures Aid Growth, While Pacific Disappoints
American Airlines’ Trans-Atlantic joint venture with British Airways and Iberia is also increasingly contributing to revenues with over 100 joint corporate dealings forged during the last quarter. Revenue growth was however offset Pacific flying where a disappointing recovery of U.S. point-of-sale traffic to Japan, post the earthquake, drove unit revenues down 7%. This also led to lower international advance bookings for the winter.
Costs Pressures Led By Rising Fuel Prices Offset Revenue Performance
The healthy top-line performance was largely offset by mounting cost pressures from the fuel bill in the third quarter.
Fuel prices rose a whopping 40% despite hedging almost 50% of the fuel requirements in Q3, and resulted in over $600 million in additional fuel expense year-over-year. Unit costs ex-fuel were up 4% y-o-y due to additional capacity reductions, revenue related expenses such as credit card fees and booking fees and commissions that increased aircraft rent related to the company’s fleet renewal plan.
Efforts are underway at American to achieve a competitive cost structure as it replaces older, less efficient planes and continues to negotiate for more reasonable benefits and higher productivity with its pilots union.
Capacity Adjusted Downward for Q4
American saw a marginally higher capacity in Q3 2011 over last year but is now adjusting capacity down by about 3% y-o-y in Q4 in the wake of uncertain overall economic environment, ongoing high fuel costs and additional pilot retirements. The company is implementing capacity cuts by reducing flight frequencies, reducing flying on some days of the week and substituting smaller aircraft for larger aircraft in some cases.