American Airlines’ finances take off after bankruptcy, merger

01/28/2014 7:32 AM

01/28/2014 10:26 AM

For the first time since American Airlines merged with US Airways, Wall Street investors got to look at the airline’s books Tuesday. And they liked what they saw.

The Fort Worth-based airline, now the world’s largest, sports more than $10 billion cash in the bank, lower fuel costs and international expansion plans for 2014. With a new management team making progress on integrating the two airlines, investors bid up the company’s stock (ticker: AAL) by almost 6 percent.

The positive details of American’s finances were laid out in a fourth-quarter earnings report showing that the airline posted a $2 billion net loss because of reorganization charges and bankruptcy claims. But the picture going forward is brighter.

“It is really early in the merger, but we’re off to a great start,” Doug Parker, American’s chief executive, said during a conference call with investors and Wall Street analysts. “We are looking forward to improving on these results in 2014 as we further integrate our airlines.”

Revenue grew 24 percent to $7.4 billion in the fourth quarter, with 23 days of US Airways operations included to account for the time after the airlines merged Dec. 9. That compares those results for the combined company with American’s fourth-quarter results in 2012.

The 2013 quarterly results included $2.4 billion in special charges, mostly reorganization charges as part of the bankruptcy claim process. Not including the one-time accounting items, the airline posted a profit of $436 million in the quarter, or 59 cents per share. Wall Street analysts, who do not include the accounting charges, had estimated that American would earn 55 cents per share.

American’s stock closed at $31.96 on Tuesday. Since the beginning of the year, it has gained more than 26 percent.

“We are becoming more and more comfortable with American’s story going forward despite the challenges of merging two companies,” Cowen and Company analyst Helane Becker told investors in a research note Tuesday.

Executives said the carrier expects capacity to be up 3.5 percent this year as it replaces older aircraft with newer planes and reallocates planes on longer routes. The company will be rebanking its hub airports, starting with Miami this year, to concentrate more of its arrivals into a narrow time frame and to concentrate connecting flights. Its hub at Dallas/Fort Worth Airport will be rebanked in spring 2015.

American also plans to add seats to its aircraft. President Scott Kirby said the airline will increase its MD-80s to 140 seats from 135. Its Boeing 737-800s will increase to 160 or 164 seats, from 150, while the Boeing 777-200s will jump to 260 or 289 seats, from 247. Kirby said some of the additions will be “slim-line seats” with a thinner design so airlines can fit more rows into an aircraft and maintain the same legroom between rows.

International capacity will increase 9 percent, partly because of new flights from DFW to Shanghai and Hong Kong scheduled to begin in June. Kirby said the company has received all necessary government approvals for the Chinese flights and is pleased with the slot times.

Because the merger closed late in the fourth quarter, American also provided financial results as if the two companies had been combined for the full quarter and in 2012. Under the combined results, American had an operating profit of $288 million, up from $130 million in the fourth quarter of 2012.

Revenue increased 8.7 percent to $9.98 billion as the combined airline increased capacity by 3.4 percent. Unit revenue also increased 5 percent.

Kirby told investors on the conference call that the carrier expects revenue per available seat mile to grow 2 to 4 percent in the first quarter of 2014, adding that travel demand is strong.

“We appear to have underestimated the profit potential of AAL,” JPMorgan analyst Jamie Baker said in a research note Tuesday afternoon.

American expects to pay an average of $3.07 to $3.12 per gallon for jet fuel in the first quarter. While it has fuel-hedging contracts in place through 2015, American will no longer hedge fuel prices, adopting US Airways’ policy.

The company continues to integrate the airlines and hopes to add code sharing to all flights in each network by the end of February. In the first two weeks of code sharing that began Jan. 7 on some hub flights, American booked 70,000 code-share tickets, Kirby said.

And the airlines’ unions are making progress on deciding how to merge work groups, Kirby said. However, the company doesn’t expect single seniority lists for pilots and flight attendants to be ready until early 2015.

On Monday, the two flight attendants unions agreed on a process and timeline to negotiate a new joint contract with American. US Airways attendants, represented by the Association of Flight Attendants, will vote on the agreement to join American’s union, the Association of Professional Flight Attendants.

“Throughout American’s bankruptcy and this merger, flight attendants worked together to blaze our own trail. At the end of the trail is the joint contract that represents how hard we’ve worked and how successful the new American will be,” APFA President Laura Glading said.

American is working with the government to divest slots and gates as part of its antitrust settlement with the Justice Department. The auction process is proceeding for slots at Washington Reagan Airport but has not begun for two gates at Dallas Love Field.

“If we had a choice, we’d get to keep them and we’d fly out of Love Field,” Kirby said.

For the full year, the company reported a loss of $1.8 billion, including $3.1 billion in accounting charges. That is an improvement from 2012, when American, while in bankruptcy, posted a loss of $1.9 billion, with $1.7 billion in charges.

The airline ended the year with $10.3 billion in total cash and investments, $1 billion of which was restricted.

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