MIAMI — American Airlines Group reported a record $480 million profit in the first quarter of 2014, or 65 cents per diluted share. This time last year the airline posted a loss of $341 million, reflecting the enormous turnaround act the carrier has pulled off in only one year since emerging from Chapter 11 bankruptcy and merging with US Airways.

The record breaking number reflects the first full quarter since American and US Airways merged. It is worth noting that American chose to compare year over year (YOY) stats as though American and US Airways were already combined in Q1 2013, and for the sake of ease we’ll do the same here. The profit also includes a $137 million net special credit, which according to the carrier, is made up mostly of the sale of slots at Washington Reagan.

Operating revenues grew 5.6% YOY to $9.95 billion, led by 6.6% YOY growth in mainline passenger revenues grew to $7.25 billion. Regional revenue fell 2.4% YOY to $1.41 billion, mirroring declines at Delta and United. Cargo and other, which usually refers to frequent flyer revenues and the like, grew 4.9% and 10.4% YOY to $206 million and $1.12 billion, respectively.

(Credits: Airbus S.A.S)
(Credits: Airbus S.A.S)

Revenues for both mainline and regional combined operations grew in large part thanks to a 3.02% YOY increase in yield to 17.03 cents, which drove a 2.9% YOY jump in passenger revenue per available seat mile (PRASM) to 13.67 cents. Capacity as measured in available seat miles (ASMs), grew 2% YOY. Mainline PRASM did especially well, growing 3.8% YOY to 12.77 cents on a 4.7% jump in yields to 15.84 cents. Regional operations produced a mild PRASM gain of 0.8% to 21.45 cents, while yields dropped 3.6% YOY to 27.82 cents.

Turning to region-specific performance, year over year PRASM performance was mixed. Domestic PRASM jumped 6.3% YOY to 13.24 cents, while Pacific jumped 8.6% to 10.11 cents on a 1.0% increase and 5.0% decline in ASMs respectively. Latin American PRASM dropped 1.2% YOY to 13.62 cents on 6.2% YOY growth in ASMs, though yields ticked up 2.6% to 17.82. Atlantic operations followed a similar pattern, with PRASM dropping 2.4% to 9.96 cents thanks to an 8.3% jump in ASMs, and yields ticking up 2.8% to 14.00 cents.

The region specific performance for American is interesting given that it reverses the normal dynamic of American’s network strengths. The Pacific is by far American’s weakest international region (too heavily concentrated on Japan, which had the impact of currency devaluation as well). On the flip side, the structural weakness likely made for a very easy YOY comparison.

American 777-300 (Credits: Via Commons)
American 777-300 (Credits: Via Commons)

Two factors are likely to affect performance for American in the Pacific in coming quarter. First, the reconfiguration should better align the fleet with market demand in Asia, though it didn’t add as many seats as were perhaps necessary. The second factor is the launch of Dallas/Fort Worth – Shanghai & Hong Kong, as well as the rising maturity of the flight to Seoul-Incheon. The former two flights will likely hold down PRASM in the region even as the latter flight tamps that down a bit.

Latin American PRASM declining made sense given the currency shenanigans in Venezuela and the economic weakness in Brazil and Argentina (secondary Brazilian cities in particular were weak, and American is the most exposed to these cities). Trans-Atlantic operations weakness made sense given the macroeconomic scenario in Europe at the moment. That being said, an 8.3% increase in capacity YOY is a curious decision given that the combined carrier’s higher costs render much of pre-merger US Airways’ trans-Atlantic network unprofitable in the winter months.

Operating expenses fell 0.3% YOY to $9.26 billion, led by 6.7% YOY decrease in fuel spending to $2.71 billion, thanks to a 4.8% decrease YOY in per gallon costs. Maintenance expenses also fell, falling 3.2% YOY to $485 million.

The combined maintenance and fuel cost declines reflected the rapid pace of re-fleeting at pre-merger American Airlines. The decreases managed to outpace a major increase in labor costs, which grew 12.7% YOY to $2.11 billion, reflecting the contracts signed with employees to get them to sign on to the merger.

Consolidated operating cost per ASM (CASM) correspondingly dropped 2.4% YOY to 14.62 cents, though CASM excluding fuel and special items rose 3.7% YOY to 9.76 cents driven primarily by the increase in labor costs.

American ended the quarter with a total of $10.6 billion in cash and short term investments, which brought its net debt to $7.02 billion. American’s operating profit for the quarter was a healthy $730 million for a 7.3% operating margin (against 1.8% in Q1 2013), which actually superseded Delta 7.0% operating margins for the quarter. This figure likely reflects the relative strength of American in Latin America and Delta’s larger exposure to Asia.

American’s fantastic financial performance (in comparison to United and even Delta) should leave investors bullish on the prospects of American looking forward into 2014. According to an investor update filed today, American expect Q2 CASM to be up 1-3% YOY excluding fuel, and we project American to report a record full year profit for all of 2014.

The key element to watch moving forward for American’s earnings will continue to be the pace of the US Airways integration. American has already made significant progress towards integrating the two companies (walking in with labor integration certainly helped), and appears to be proceeding at a pace similar to Delta-Northwest, rather than that of United-Continental or Southwest – AirTran. American-US Airways is on track to hit its eventual $1.1 billion in merger synergies, and we actually project that the total figure will be some $400 million higher.

Part of this (~$150 million) comes from the benefits of cross-fleeting (especially moving 737s to Charlotte/Philadelphia, and A320s to DFW) and better matching aircraft to route and demand, while the other components include the fare benefits of our projected 15% capacity decrease at Charlotte and 25% capacity decrease at Phoenix, as well as the revenue benefits of re-banking pre-merger American hubs.