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American Airlines widens loss gap

21st July, 2011

Analysts were expressing frustration with American Airlines during yesterday’s earnings call when it reported a net loss of USD286 million for the second quarter compared with a net loss of USD11 million in 2Q2010. While losses jumped from the year-ago quarter, they narrowed from the first quarter when it posted USD405 million in net losses.

CFO Bella Goren said its advance bookings load factor was up slightly over last year and the carrier was seeing better trends than June. On the pricing side, the activity in the first quarter for fare hikes ended in April and the most recent fare hike attempted by United, was dropped when Southwest instituted a fare sale instead. While still benefiting from higher revenues, she said, it is not enough to offset fuel increases which overwhelmed any traction on the revenue side, despite the strength in demand.

In back-to-back press conferences and earnings calls, American announced a 460 narrowbody aircraft order which it said would contribute to its path to profitability by saving 35% in fuel costs when 230 current generation Airbus A320 and Boeing 737NG aircraft commence delivery in 2013. They will reduce fleet types from MD-80s, 737-800, 757 and 767-200s to the two new families of aircraft. See related story: American announces ‘transformational’ order but may not end analyst criticism

CEO Gerard Arpey said the order helps to close the gap between its largest regional jet the CRJ 700 at 65-seats and the 140-seat MD 80 which will now be replaced with either Boeing or Airbus aircraft. The new aircraft will also replace the 757 on small-runway, high-altitude airports such as the ski markets. they will also better match capacity to demand and afford more non-stop flights from its cornerstone markets.

While American emphasised the aircraft order would be operating leases so they would be off the balance sheet, Dahlman Rose analyst Helane Becker was not buying it, illustrating the continue skepticism analysts have for the company.

“The debt associated with those aircraft will be off balance sheet as the aircraft are being financed under operating leases,” she wrote in a research note. “In general, we capitalise the off-balance-sheet debt at seven-times first-year rental rates, so we are looking at debt increasing, not decreasing through this order.”

Also helping to reduce maintenance and other costs will be the planned divestiture of American Eagle. Few details were provided although the company said it would file a Form 10 which will provide the details, including financial statements in August. See related story: At long last, divestiture for American Eagle

Guidance

It expects full-year mainline capacity to be up 1.9% compared with 2010 and domestic capacity to drop 0.1%. International capacity will be up 5% compared with 2010 and on a consolidated basis, the company expects full-year capacity to be up 2.6%.

For the third quarter it is projecting a 1% capacity increase for the mainline while domestic will be down 0.8% and international up 3.5%. Consolidated third quarter capacity will be up 1.6% year on year.

Unit costs for the third quarter are expected to increase 12.9-13.3% year on year but ex fuel only 2.4-2.6%. Consolidated CASM is expected to rise 13.1-13.5% in the third quarter or 2.6-3.0% ex fuel.

American is using capacity cuts to improve its prospects including asking the Department of Transportation for a waiver on its New York-Tokyo Haneda service when it is suspended in September until mid-2012, noting that other airlines have been granted such waivers. Also on the chopping block are San Francisco-Honolulu and Los Angeles-San Salvador. In addition, it is conferring with its trans-Atlantic joint business partners to cut capacity in that market owing to over capacity which is diluting yields.

American said it took a USD60 million hit on weather and the aftermath of the Japanese earthquake in the quarter while fuel expenses rose 31% to about USD3.12 per gallon adding USD524 million dollars to its fuel costs year on year.

Analysts seemed less than impressed about the Eagle and aircraft announcements. They have been suggesting American cut non-performing markets.

Rodman and Renshaw analyst Dan MacKenzie repeated concerns during the earnings call, clearly not buying CFO Bella Goren’s explanation that compared to the industry its capacity was down much further if you look back to 2006. Mr Arpey unsuccessfully tried this explanation during the first quarter call and made similar headway with analysts as a result.  Ms Goren’s only explanation was the fact it had dropped capacity making the comps harder.

Both he and Deutsche Bank's Mike Linenberg noted the carrier’s margin performance versus its peers has deteriorated significantly in the second quarter arresting a convergence trend that had been occurring over the last few quarters.

The company’s RASM performance also represented a big gap to its peers and Bank of America/Merrill Lynch analyst Glen Engel expressed scepticism with the answer. Ms Goren said the gap worsened in June citing the weather and earthquake but Mr Engel noted that only represented a point. She added that American was only now beginning to see the USD500 million benefit it expected to see from the cornerstone strategy and joint business agreements across the Pacific and Atlantic, noting the full run rate would not happen before the end of 2012. She also said the trend was better for the rest of the summer.

President Tom Horton jumped in to say that the company was in the process of pulling down markets in which it is not strong. He said adjustments in the schedule were positive. Indeed, in the autumn American will be cancelling 270 departures on those days.

Mr Horton said the airline is making seasonal and day-of-the-week cuts to Tuesday, Wednesday and Saturday schedules to cut capacity rather than abandoning markets. It is also discontinuing its Dublin reservations operations citing the move of travellers to self-booking sites on the internet.

Mr Arpey had an interesting conversation with analyst Bill Greene on labour costs. The company has been saying that it is a competitive disadvantage because it didn’t restructure labour costs through bankruptcy as its peers did.

“The biggest place were we are off market on labour costs is not pensions,” he explained to Mr Greene who had thought that it was. “The structural disadvantage comes because our employees don’t contribute as much to medical plans and that is an order of magnitude of about USD200-250 million per year compared to our peers. We are talking to our employees about this.”

Revenues

Consolidated revenues reached USD6.1 billion, up 7.8% year on year. Mainline, regional and cargo and “other” revenue was up year on year increases as total operating revenues rose USD440 million in the second quarter 2011 over 2Q-2010.

Ms Goren noted that the trans-Atlantic joint business members - American, British Airways and Iberia are now selling jointly to corporate accounts and will complete moving over 200 corporate accounts to the joint business in August.

Revenue per available seat mile (RASM) grew 4.9% while mainline unit revenue rose 4.3% to 11.62 cents reflecting a modestly improved revenue environment. Yield rose 4.6% to 13.90 while mainline unit costs ex fuel increased 1.4%

It finished the quarter with USD5.6 billion in cash and short-term investments, including a restricted balance of approximately USD457 million. In 2010, those numbers were USD5.5 billion and USD461 million, respectively.

Total debt is at USD17.1 billion, compared with uSD16.1 billion in 2Q-2010. Net debt was USD11.9 billion compared with USD11 billion in 2Q2010.

AMR Corp 2Q2011 financial highlights

  • Three months ended 30-Jun-2011:
    • Operating revenue: USD6114 million, +7.8% year-on-year;
    • Operating costs: USD6192 million, +13.0%;
      • Fuel: USD2202 million, +33.1%;
      • Labour: USD1764 million, +2.9%;
    • Operating profit (loss): (USD78 million), compared with a profit of USD196 million in p-c-p;
    • Net profit (loss): (USD286 million), compared with a loss of USD11 million in p-c-p;
    • Mainline traffic:
      • Passenger traffic (RPMs): +1.8%;
      • Passenger load factor: 83.6%, -0.3 ppt;
      • Passenger yield: USD 13.9 cents, +4.6%;
      • Passenger revenue per ASM: USD 11.62 cents, +4.3%;
      • Operating costs per ASM*: USD 13.86 cents, +9.7%;
  • Six months ended 30-Jun-2011:
    • Operating revenue: USD11,647 million, +8.4%;
    • Operating costs: USD11,956 million, +10.3%;
      • Fuel: USD4044 million, +29.2%;
      • Labour: USD3486 million, +2.0%;
    • Operating profit (loss): (USD309 million), compared with a loss of USD102 million in p-c-p;
    • Net profit (loss): (USD722 million), compared with a loss of USD516 million in p-c-p;
    • Mainline traffic:
      • Passenger traffic (RPMs): +1.7%;
      • Passenger load factor: 80.4%, -0.6 ppt;
      • Passenger yield: USD 14.03 cents, +5.4%;
      • Passenger revenue per ASM: USD 11.28 cents, +4.6%;
      • Operating costs per ASM**: USD 13.63 cents, +6.8%;
    • Cash and short-term investments: USD5,600 million, +1.8%;
    • Net debt: USD11,900 million, +8.2%;
  • 3Q2011 forecast:
    • Cost per ASM: +13.1% to +13.5%;
    • Excluding fuel: +2.6% to +3.0%;
  • FY2011 forecast:
    • Cost per ASM: +9.0% to +10.0%;
    • Excluding fuel: +0.5% to +1.5%.

*Excludes USD793 million and USD662 million of expense incurred related to Regional Affiliates in 2011 and 2010, respectively
**Excludes USD1.5 billion and USD1.3 billion of expense incurred related to Regional Affiliates in 2011 and 2010, respectively

AMR: "This past quarter was challenging in many respects. We remain acutely focused on taking the necessary steps to manage through our near-term challenges while continuing to lay the foundation for long-term success. We believe we have the right framework under our Flight Plan 2020 strategy to achieve our long-term objectives for the benefit of all our stakeholders, and today we took several major steps forward.” Gerard Arpey, Chairman and CEO. Source: AMR Corp, 20-Jul-2011.

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