MIAMI — American Airlines Group reported its highest quarterly profit ever on Thursday, announcing a net profit of $864 million, or $1.17 per diluted share. Excluding special items, the Dallas-based airline reported a net profit of $1.5 billion as it continue its astoundingly quick post-bankruptcy recovery after consummating a merger in December of 2013.

Total operating revenues leapt 10.2% year-over-year (YOY) to $11.35 billion, Strong mainline revenue performance drove much of the improvement, rising 10.3% YOY to $8.21 billion. Regional revenue rose as well, climbing 4.1% to $1.70 billion, while cargo revenue rose 8.3% YOY to $221 million. Both of these figures belied the trend amongst American’s peers, as both United and Delta saw regional and cargo revenue decline.

Despite the economic recovery in the United States, the air freight market remains exceedingly soft. Other operating revenue, which includes things like revenue from credit card agreements to sell frequent flyer miles, grew 20.5% YOY to $1.21 billion. Overall, a 6.5% increase in yields to 17.34 cents drove a 5.9% YOY increase in passenger revenue per available-seat-mile (PRASM) to 14.57 cents.

Broken down by geographic region, domestic PRASM was up 9.9% to 14.13 cents, while Latin American PRASM declined 2.5% to 12.75 cents. The second quarter represents a trough period for Latin America, so that figure is not too concerning to us. And Trans-Atlantic operations performed well, with PRASM up 2.7% to 12.39 cents. Pacific operations, which AA has struggled with, recorded PRASM growth of 9% to 10.81 cents.

The Pacific is an interesting growth avenue for American, who recorded strong PRASM performance from an extremely low base. Conversely, Latin America continues to be a drag on the overall revenue operation, mostly due to the situation in Venezuela. While each of the three largest US carriers has some exposure to Venezuela, American has the largest Venezuelan network by far, so it has commensurately suffered the greatest losses as a result. On the airline’s quarterly earnings call, American executives shared a telling statistic. American operated one flight per day between Caracas and San Juan and six flights per day between Miami and San Juan, yet 30% of revenue on Miami – San Juan came from passengers connecting from Caracas despite multiple daily nonstop flights between Miami and Caracas.

In terms of overarching financial impact, American expects to take a one percentage point PRASM hit in the third quarter and a two percentage point PRASM hit in the fourth quarter. In the trans-Atlantic theater, American has reduced its capacity growth plans for the second half of the year by three percentage points to 2%, reflecting the fact that pre-merger US Airways’ trans-Atlantic network (particularly out of Charlotte) is likely uneconomical at the new American’s cost levels.

Operating expenses grew 7.0% YOY to $9.95 billion. Labor costs ballooned 10.2% to $2.16 billion on 3.1% capacity growth as measured by available seat miles (ASMs). Aircraft fuel costs rose 2.8% YOY to $2.83 billion, reflecting a 1.3% uptick in consumption on a 1.5% increase in per-gallon prices to $3.03, but a reduction YOY on a per-ASM basis. Aircraft renting costs fell 6.7% to $312 million, but the decrease was offset by a 13.8 YOY increase in depreciation and amortization cost, due to changes in the composition of American’s fleet. Every other expense-line item decreased YOY on a per-ASM basis, and consolidated costs per ASM (CASM) rose 3.7% to 14.62 cents, while CASM excluding fuel and special items rose 2.5% to 9.31 cents.

For the quarter, American generated nearly 1.5 billion of operating cash flow, and recorded an operating profit of $1.4 billion, good for an operating margin of 12.3%, slightly worse than that of rival Delta Air Lines, but stronger than that of United. In terms of capital deployment, American spent $630 million in the first half of the year on purchasing aircraft off of lease, and plans on utilizing an additional $370 million of cash thru 2014 on the same model.

Pre-merger US Airways’ fleet philosophy erred strongly on the side of owned aircraft, and the new American appears to have abandoned Tom Horton’s final gambit of winning extremely cost effective operating leases from Airbus and Boeing while attempting to conserve capital before exiting Chapter 11 bankruptcy. Since the merger, American has prepaid nearly $420 million in aircraft debt and it plans to prepay an additional $480 million in revenue bond obligations.

American’s share repurchase plans include an authorization from the board to buy back $1 billion worth of shares by December 31, 2015. And in a pair of moves that reflect the unprecedented state of the US airline industry’s finances, American plans to contribute $600 million to its pension plans in 2014 (above the $120 million base requirement), and pay out a cash dividend of 10 cents per share (American’s first cash dividend since 1980!)

Unlike United and Delta, who have had time to accrue synergies from their merger and the reduction of 50-seat regional jets in the fleet, American’s strong financial performance belies the fact that it likely has several hundred million, if not more than a billion dollars worth of synergy improvement forthcoming. Specifically on the topic of synergies, initiatives such as putting more seats in aircraft, re-banking the American hubs, and changing pre-merger US Airways’ revenue model to become more aggressive are expected to begin boosting revenue as early as the fourth quarter.

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