Sep 24, 2020
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No Matter How Much Money American Airlines Prints, Investors Worry Mostly About Unit Revenue Trends

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Photographer: Victor J. Blue/Bloomberg American Airlines flush with cash looks doing everything one would reasonably expect. It’s buying new aircraft paying employees more paying taxes after years of losses and purchasing back quite a lot of stock – large amounts getting larger. Too bad investors don t seem to care. They still discuss an arcane metric called passenger revenue per available seat mile which measures the revenue produced whenever passenger who flies one mile

 

For more than two years PRASM has been falling during the industry. At the Delta earnings call last week incoming Delta president Glen Hauenstein declared Most of this decline has been caused by the decrease in fuel. That’s good for airlines but bad for airline stocks which are generally in decline this year because airlines can t seem to figure out when PRASM will finally turn positive

 

American said Friday that current quarter PRASM will likely fall between 6% and 8% after a first quarter decline of 7. 5%. In midday trading Friday American shares stood at $38. 19 down about 5% largely according to PRASM trends. At the earnings call CEO Doug Parker said he is not unconcerned about PRASM he’s just not as concerned as Wall Street is

 

We care like crazy about our revenue trends Parker said. But I have the sense we don t care up to some of your investors. If I was an investor who had short-term trading at the horizon I would care about tomorrow. But our job is to maximize long-term shareholder value

 

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However he added: We just happen to believe that long-term prospects for the stock are not reflected in the current price. Therefore American today is in full buyback mode. It returned about $1. 6 billion in buybacks and dividends to shareholders during the first quarter and on Friday it said it has authorized a new $2 billion share repurchase program that will expire at the end of 2017

 

It reported first quarter earnings of $1. 25 a share prior to the consensus estimate of $1. 18. EPS gained partially because through buybacks the variety of shares falling rapidly. American has about 611 million shares down from 717 million a year earlier. Pre-tax profit was $1. 2 billion after American set aside $456 million to pay taxes

 

Just $3 million of that tax payment is in cash: the rest represents operating loss utilization. American also set aside $73 million for profit sharing step one in its implementation of a plan to pay out 5% of profits to employees. Moreover American has the latest fleet one of the four major airlines with an average aircraft age around 10 years due to the taking new aircraft at a pace of around one every four days

 

Businesses are meant to be profitable: ours is and we think to remain Parker said. We can make money and installed improved product – that’s what businesses are meant to do. The industry is transformed and American Airlines is transformed Parker said. But criticism of American s financial strategy also emerged Friday

 

For something American is not paying down debt as quickly as competitors. In a note Friday regarding American debt JP Morgan analyst Jamie Baker said American is obviously the weakest credit of the Big US Legacy Three. He said Delta has reached investment grade and United has aspirations for investment grade metrics while conversely American has yet to make any variety of definitive credit metric improvement commitments

 

In its defense American has said that while other airlines choose to lease aircraft it’s retaining aircraft debt because interest rates are so low. Another concern is that American has been relatively slow to fund employee pension plans. Dennis Tajer spokesman for the Allied Pilots Association said the carrier is making only the minimum required payments to the plans

 

It s like making only the minimum payment on your credit cards Tajer said. That may make you feel good for the month but long-term you still have the liability and the risk. American spokesman Casey Norton said the carrier meets all its pension funding obligations after a 2014 contribution of $781 million including $613 million in supplemental contributions above and beyond what was required

 

Therefore American had no minimum required contributions obligations in 2015 and 2016 he said

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