American Airlines Group, Inc. reported a massive jump in Q1 earnings last Friday. Adjusted profit tripled year over year to $1.2 billion, even as revenue declined 1.7%. The tailwind of low fuel prices is allowing American to easily overcome the other headwinds it faces.
American Airlines' profit is soaring due to lower fuel prices. Photo source: American Airlines.
American's top leaders spent about an hour talking to analysts and the media about the company's results and outlook on Friday morning. Here are five of the main points they tried to emphasize.
Reaping the benefit of cheap oil
In 2014, American Airlines earned a record adjusted profit of $4.2 billion. For 2014, American's management expects the benefit from lower fuel prices alone -- $4.35 billion -- to be bigger than the company's entire (record) profit from last year!
Some of these fuel savings are being offset by cost increases related to new labor contracts. American also needs to offset the impact of the strong dollar and weak demand in Brazil and Venezuela. Nevertheless, the magnitude of American Airlines' fuel savings is so great that it will produce strong margin expansion this year despite these other cost and revenue headwinds.
Moderating growth plans
American Airlines posted a modest decline in passenger unit revenue of 1.7% last quarter. It is projecting a sharper 4%-6% decline in Q2 as key headwinds like the strong dollar, falling fuel surcharges, and rising competitive capacity worsen.
So far, American's profitability remains intact, but the management team isn't resting on its laurels. In fact, the company has cut its capacity outlook for four straight quarters as international demand growth has softened. American also went a step further last week by deferring the delivery of five Dreamliners scheduled to arrive next year until 2017 and 2018. This will reduce its international capacity growth next year.
Integration work is on track
The merger integration process is on track so far. Photo source: American Airlines.
One of the biggest risks for American Airlines investors right now is the ongoing process of integrating American and US Airways. Many promising airline mergers in the past have hit big snags in the course of the integration process.
So far, everything is going according to plan. American Airlines completed one big integration task about a month ago: merging the two frequent flier programs. However, the biggest integration item -- merging the American Airlines and US Airways reservations systems -- won't occur until late 2015. If that goes smoothly, the merged company should be in the clear.
More merger synergies coming
While that reservation system integration comes with a lot of risk, the eventual rewards will be significant. First of all, it will allow American Airlines to better allocate its aircraft across airports and routes in order to match capacity and demand.
Second, by managing the entire business as a single airline, American should be able to fine-tune its revenue management operations. This should ultimately help the company to offset the recent revenue headwinds and return to unit revenue growth next year.
No plans for major debt reduction
Many U.S. airlines have been focused on using their rising earnings and cash flow to reduce their debt levels. Delta Air Lines has been particularly aggressive in this regard, having paid down nearly $10 billion of debt in the past five years.
Investors shouldn't expect American to follow that course, at least for the time being. While the company is opportunistically prepaying some high-cost debt, Parker argued that it doesn't make sense to pursue debt reduction when interest rates are at historic lows. Recently, American Airlines has arranged aircraft financing with sub-4% interest rates.
Ultimately, this means that American may ramp up its share repurchases after it completes the merger integration process. The company has a lot of excess cash on its books. If it isn't going to be used for paying down debt, buying back stock is the most logical alternative.
The article 5 Things American Airlines Group, Inc. Management Wants You to Know originally appeared on Fool.com.
Adam Levine-Weinberg is long January 2017 $40 calls on Delta Air Lines, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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