One year out of bankruptcy, American Airlines posted its highest annual profits ever.
The Fort Worth-based carrier, which merged with US Airways in December 2013, reported $2.8 billion in profits for 2014 on $42.6 billion in revenues.
And even though planes were slightly less full in the fourth quarter, dropping fuel prices boosted American to a record fourth quarter profit,too.
American reported a profit of $597 million for the quarter compared with a $2 billion loss it reported in the same quarter in 2013. Revenues also grew 2.1 percent, to $10.2 billion.
Previously, the highest recorded profit was in 1998 when the company made $1.3 billion.
“This is the best year in the long, proud history of American Airlines and the best year by a long shot, more than double the prior record, and we’re extremely pleased to be reporting results like this just one year into our merger,” American Airlines chief executive Doug Parker told Wall Street analysts during a conference call Tuesday morning.
Despite the record profits, investors were disappointed with American’s unit revenues, a key metric of an airline’s financial performance, and as a result shares of American [ticker: AAL] dropped almost 5 percent on Tuesday, closing at $52.69 on the Nasdaq exchange.
With declining oil prices, American said it paid $2.52 per gallon of jet fuel, a decrease of 17.5 percent. Chief Financial Officer Derek Kerr told Wall Street analysts those fuel cost savings could translate to $5 billion a year, which would continue to boost American’s profits throughout 2015 since the airline does not hedge any of its fuel costs.
Excluding one-time accounting charges, American reported a fourth-quarter profit of $1.1 billion, or $1.52 a share, beating Wall Street analysts’ earnings estimates of $1.51 per share, according to FactSet Research.
Bigger than expected competition
The company announced it will pay a dividend of 10 cents per share to shareholders of record as of Feb. 9. Its board has also authorized an additional $2 billion for share repurchase plan as American has already completed a $1 billion repurchase program.
The carrier said its unit revenues declined 1 percent in the fourth quarter, partly due to increased competition from other airlines, including Southwest Airlines, which added dozens of new flights out of Dallas Love Field with the expiration of the Wright Amendment in October.
“[American] is facing headwinds from [foreign currency exchange rates], horrible demand in Latin America, low-cost carrier competition in Dallas and Washington D.C., [Delta Air Lines] Virgin in [London Heathrow], and more,” wrote Wolfe and Co. analyst Hunter Keay in a research note on Tuesday. He added that “We think the market will take it somewhat in stride, but all else equal, we’d view a pullback as a buying opportunity.”
Even though American Airlines knew the lifting of the Wright Amendment was coming in October 2014, it did not adequately predict how Southwest Airlines’ new flights out of Dallas Love Field would affect American’s flights out of Dallas/Fort Worth Airport.
“We missed the impact of 50 new routes starting up,” American president Scott Kirby told analysts when explaining why the carrier missed its unit revenue forecasts for the fourth quarter. He added that the airline knew about the routes but didn’t build that into its normal forecasting process because it’s unusual to have a competitor launch so many new routes at one time.
The carrier expects that rebanking its Dallas/Fort Worth hub — where flights will be grouped together in peaks during the day — will help improve unit revenues on flights out of DFW as the airline feeds more connecting traffic through the hub. Rebanking will happen on March 29, Kirby said.
Kirby added that demand remains strong although the carrier expects a negative impact in international markets from the strengthening U.S. dollar.
New routes, some concerns
American has plans to continue expanding to new Asian cities, but it likely won’t affect DFW. The carrier will launch its DFW-Beijing route in May but said it will focus new Asian routes out of Los Angeles. The company has asked the government for permission to fly a route between Los Angeles and Tokyo’s Haneda airport.
“I’m pretty sure with fuel prices where they are we would expect even our Asian routes to be profitable in 2015,” Kirby said
But investors also appear concerned about rising labor costs at American. The airline recently gave the majority of its employees a 4 percent raise. The company is currently negotiating joint contract agreements with all of its unionized work groups except for the flight attendants who received a new contract with significant raises in December.
Its pilots union is voting on a proposed contract offer from American that includes 23 percent pay raises. Voting will end on Friday morning with results expected from the Allied Pilots Association later that day. If the pilots approve the contract, American would have an additional $600 million in labor costs in 2015, company executives said.
Separately, there was no news on a possible headquarters announcement for the Fort Worth company. When asked about whether or not the carrier would leave its headquarters on Amon Carter Blvd., American CEO Parker reiterated that the company is looking at its options and that it’s not high on the integration priority list.
“We are studying the possibility as to what might be available. We have a perfectly acceptable facility that we’re working in today,” Parker said.
Andrea Ahles, 817-390-7631
By the Numbers
▪ Hired 7,000 new team members in 2014 including 2,300 flight attendants, 800 pilots and 300 mechanics
▪ Added 132 new aircraft to the fleet in 2014, retired 111 older ones
▪ For 2015, it will add 128 new airplanes and retire 126 older ones
▪ Announced an additional $2 billion share repurchase program to be completed by 2016
▪ Shares of AAL stock rose 112 percent in 2014. So if you invested $100 in American shares on January 1, 2014, the shares would be worth $212.40 on December 31.
▪ 10 cent per share dividend for all shareholders who have American stock on February 9
▪ If fuel prices stay low, American could save $5 billion in 2015. It paid an average of $2.91 per gallon of jet fuel in 2015 and predicts it will pay an average of $1.73 to $1.78 per gallon in 2015.
▪ Unit revenues dropped 1 percent to 13.50 cents of passenger revenue per available seat mile in the fourth quarter.
▪ Faced stiffer competition from low-cost carriers on 50 routes in markets such as Philadelphia, Washington, D.C., and Dallas Love Field. Southwest added 35 new flights to its schedule at Love Field after the Wright Amendment restrictions expired in October.
▪ Made $2.882 billion in profits in 2014 with revenues over $42.6 billion.