MIAMI — American Airlines Group (AAG) reported a net profit of $436 million, or $0.59 per diluted share, in the fourth quarter of 2013, excluding special charges on Tuesday. The Fort Worth-based company, which currently consists of American Airlines, US Airways, and three regional carriers, also reported a strong 2013 annual net profit of $1.9 billion excluding special charges, a 366% year-over-year increase (YOY) from 2012’s $407 million net profit.

The carrier’s fourth quarter results included figures for US Airways (currently its highest margin business), only from December 9th (when the merger closed) through December 31st, so the results are slightly skewed. For the fourth quarter, US Airways by itself lost $155 million, while for the full year, they recorded a net pre-tax profit of $631 million, essentially flat YOY. Special charges incurred by the collective airline group during the period included:

  • $2.2 billion expense due to reorganization charges
  • $497 million expense due to merger related one-time costs for pilots
  • $324 million benefit due to deferred tax liabilities
  • $31 million benefit due to changes in the AAdvantage partnership with Citibank
  • $21 million in onetime interest charges post-bankruptcy

Including these special items, American recorded a fourth quarter net loss of $2.0 billion, while the full year net loss was $1.8 billion (including $3.1 billion in net special charges), a 2.8% improvement YOY.

Given that American’s finances are in a state of flux thanks to its exit from bankruptcy and consummated merger with US Airways, it is more instructive to consider its operating results when analyzing the underlying business. In the fourth quarter, the combined carrier (including US Airways results for the full period) recorded an operating profit of $288 million, for an operating margin of 2.9%, while for the full year, the combined carrier recorded an operating profit of $2.58 billion, good for an operating margin of 6.4%.

*Note – For the remainder of this article, we will only consider combined full year results for the full American Airlines Group (AA, US, AE, etc), unless otherwise noted.

The full year operating margins illustrate very clearly that American has not fully completed its restructuring process. While the carrier officially exited bankruptcy in early December, utilizing the benefits (increased employee productivity, better work rules, an improved scope clause, the better contract with Envoy/American Eagle) negotiated during bankruptcy will take time. Case in point, the carrier placed an order for 60 Embraer E175s and 30 CRJ-900s in December – but the financial benefits from these airplanes will not show up in the finances until later this year.

Additionally. the operating margin figures also show the potential that the US Airways – American combination has to deliver industry leading financial results. At 6.4%, the new American’s operating margins are already on par with those of Delta in 2010 (the first full year of the merger), and close to double the operating margins of United, who has had the benefit of a scale-increasing merger for more than two years.

There is plenty of untapped potential in the merged carrier to the tune of $1.5 billion in promised synergies. I would posit that the real potential lies closer to $1.8 billion if the carrier engages in cross-fleeting as aggressively as Delta.

This would entail shifts such as bringing the A319 fleet to O’Hare, moving A321s to Dallas/Fort Worth, and sending 737-800s to Charlotte/Philadelphia because the 737 is more economic on shorter routes while the A320 is more economic on longer ones. And unlike the management at United post-merger, this current management team has a proven record of being able to deliver on merger synergies.

Turning to the specific line items, total 2013 operating revenue jumped 4.7% YOY to $40.42 billion. The increase was led by heavy gains in mainline passenger revenue, which increased 5.7% YOY to $29.27 billion YOY. Regional carrier revenues were essentially flat, while other operating revenues (such as those from the frequent flyer program) increased 5.3% to $4.05 billion.

Consolidated AAG passenger revenue per available seat mile (PRASM – which includes ancillary revenues such as checked baggage fess and change fees) rose 2.7% YOY to 13.67 cents. The PRASM increases were due to a healthy bump in yields for the carrier(s). Combined consolidated yield was 16.49 cents in 2013, up 2.3% YOY on a 1.2% increase in capacity as measured by available seat miles (ASMs).

Turning to region by region performance,



4Q 2013 PRASM Growth

4Q 2012 RASM (cents)

4Q 2012 CASM (cents)

4Q 2012 Operating Margin (%)

4Q 2013 Projected Operating Margin (%)







(-4.1) to        (-3.4)%







(-16.1) to      (-15.4)%


Latin America





12.5 to 13.2%

US Airways






(-7.2) to        (-6.5)%

US Airways

Latin America





5.4 to 6.1%

The fourth (and first) quarters are difficult periods for most carriers internationally, but because so much of American’s international network is concentrated on a) regions where the winter is the peak season (Latin America) and b) business heavy airports such as Tokyo Narita and London Heathrow in the other regions, it tends to outperform the industry on international margins during these quarters. US Airways’ international network is Europe heavy and extremely seasonal, so the -6.5% operating margin (which is at least 33% smaller than that of Delta or United) is not that alarming.

Meanwhile, American’s Pacific network is going to be a loss leader for the carrier for some time. Every US carrier is suffering yield pressure due to expanded capacity from Asian airlines across the Pacific. Adding to the challenges, American’s primary trans-Pacific gateways are either hyper-competitive (Chicago O’Hare & Los Angeles) or lack high yield O&D volume (Dallas/Fort Worth), and the ability to connect passengers onwards through joint venture partner Japan Airlines’ hub at Tokyo Narita has declined as the latter has rebalanced its network in favor of Tokyo Haneda.

On the expenses side, 2013 operating expenses increased 0.6% YOY to $37.84 billion. Despite a major 8.5% reduction in employee salaries due to the bankruptcy restructuring, every other major cost line item rose YOY from 2012. In particular aircraft rent was up 11.7% YOY to $1.34 billion, rent and landing fees rose 6.1% YOY to $1.70 billion, and sales expenses jumped 5.6% YOY to $1.61 billion.

Excluding special charges, combined and consolidated cost-per-available-seat-mile (CASM) was 14.29 cents, down a healthy 2.2% YOY. Labor cost per available seat mile (LCASM), led the charge, declining 12.7% YOY. Consolidated CASM excluding fuel declined 1.9% to 9.21 cents, and as with total CASM, American saw major unit cost declines while cost ticked slightly upwards at US Airways

American ended the year with $10.3 billion in cash reserves, including $710 million held hostage by the Venezuelan government in Bolivars. This space will be updated with additional details on the company’s balance sheet and cash flow when those details are provided.

2013 was important for American Airlines Group, primarily because the group itself came into existence during the course of the year. The carrier fought off a frivolous DOJ lawsuit and emerged relatively unscathed, and consummated a merger that promises massive synergies. Looking forward into 2014, expect results to be a mixed bag.

Revenues should increase sharply as American begins to tap into the power of the combined carrier’s network to re-assert its longstanding historical dominance of corporate travel contracts in the US. Restructuring charges will take a bite out of profits the next two years, but in the longer term, AAG is well positioned to deliver excellent shareholder returns, albeit with the caveat that free cash flow generation is likely to lag behind that of Delta for some time due to the higher capital expenditure commitments implicit in refreshing pre-merger American’s fleet.