Outstanding analysis of AAL's finances

[WorldTraveler]

Market Realist has posted an outstanding analysis of AAL's financial performance as they have done with other carriers. Several people have indicated they want to see more evidence to support some of the statements that were made about AA's finances.

http://marketrealist.com/2014/07/overview-operating-performance-and-valuation-indicators/


There has been a 17% reduction in AA's labor costs because of BK

AAs revenue share went from 3rd to 1st as a result of the merger with AA at 28%, UA at 27%, DL at 26%

AA and UA have similarly sized domestic systems AS A PERCENT of their total revenue 57%; DL is higher at 65%; low cost carriers are almost entirely domestic

US Advantage Fare program was based on pulling revenues from the larger hubs of other carriers; it received most of its gains by undercutting AA in AA markets but it affected other airlines as well (thus AA stood to gain the most by merging with US and having the Advantage Fares program eliminated OR the AA/US merger served to eliminate one of the largest carriers that was undercutting AAs fares not unlike what happened with AA/TW and WN/FL and part of why both AA and WN have seen large RASMs)

New AAs profit margin has increased as a result of improvements at both AA and US

AAs debt has nearly doubled in two years as a result of AAs own fleet renewal and US debt which came with the merger.

AAs debt repayment will be $1.6 billion per year and operating cash flow of $1.2 billion per year which means AA will either reduce cash to maintain the same debt level or increase the total amount of debt.

AA/US have estimated that more merger synergies will come from network than in any other merger 75-85% compared to 15-25% in cost reduction. The total amount of merger synergies is the smallest of any of the big 3 mergers about half of what DL expected.

In previous mergers, integration costs exceed merger synergies. DL and UAs integration costs were in excess of $1.5 billion, larger than the merger synergies and the integration costs of $1.2B that AA is expecting. AA has recorded very few integration expenses.

AA has outperformed analyst expectations, particularly regarding revenue which is a key driver of its stock performance.

Note: The analysis does not include any discussion of the Venezuela situation. Other analyses have noted that AA is owed approx. $750 million which amounts to about 9% of AAL's 1st quarter 2014 revenues. The revenue was not all earned in one quarter but it does highlight that, if AA has to write off or write down its revenues from Venezuela, it could reduce their revenue by about 2% on an annualized basis as well as RASM in the quarters in which it was earned.

 

[FWAAA]

AAs debt repayment will be $1.6 billion per year and operating cash flow of $1.2 billion per year which means AA will either reduce cash to maintain the same debt level or increase the total amount of debt.

Had you read the analysis carefully, you would have read that AA's operating cash flow was $1.2 billion in the first quarter, not per year.
 
Given your demonstrated weaknesses with numbers, perhaps you should simply link to the report and summarize your opinions about it instead of posting inaccurate, untrue and misleading data excerpts from it.    We get it - you're rooting against AA.    I don't like Delta, but you don't find me posting false and misleading statistics about DL as often as you do about AA.    
 
You're right:  it is an excellent analysis of AA's finances - much better and more accurate than your inaccurate postings about AA's finances.   Like I posted the other day when you made up some numbers, it's become far too typical of your posts.  Your Credibility?   Zero.    
 
Here is the entire paragraph from the report:
 
 
 

Cash—liquidity
It is often advantageous if a company’s capital expenditure can be financed through internal cash flows rather than through debt. AAG’s debt is already very high. In March, 2014, AAL had a cash and short-term investment balance of $10.6 billion. It had an undrawn revolving facility of $1 billion. With a total liquidity of $11.6 billion and operating cash flow of $1.2 billion in 1Q14, which is sufficient to cover the entire year’s capital expenditure of $2.1 billion, the company has the capability to expand with internal funds if everything goes favorably as in the first quarter. In addition to capital expenditure, AAG’s debt repayment burden has increased after the merger requiring an annual debt repayment of 1.6 billion.

 

[WorldTraveler]

yes, you are right, it is a figure for one quarter.

other analysts have shown that, even with AA's 1st quarter cash generation, it still comes nowhere near close to covering the amount of debt that AA is taking on over the long haul.

the analysis I linked - the link IS right there - doesn't make forward financial projections.

You skimmed right past the fact that AA is planning $1.6B in annual principal payments on its debt which is ON TOP OF the current debt is taking on with $2.1B in capital expenditures WHICH IS ON TOP OF the merger integration expenses which will likely top $1.5B WHICH IS ON TOP of its Venezuela debt write off.

I'm sure you are aware that AA execs have suggested that AA might engage in a plan to boost stockholder value similar to DL's $2 billion stock buy back as well as other measures.

So, their statement about AA being able to cover this year's capital expenditures with current cash generation is true, but when you add in all of the other items, the chances are very high that AA will start either burning cash on hand or take on additional debt.

If you remember, UA also had a huge amount of cash on hand after their merger -because two companies need more cash than one larger one.

Given that the cash is largely borrowed, it makes little sense to maintain such high cash levels.

UA paid off debt, spent some supporting their operational losses, and used some for integration expenses.

Other carriers have the capability to take on further debt if they want to but are not.

And all of this is based on the current economic situation remaining as is. If the industry deteriorates, AA's ability to service all of those expenses and obligations becomes a lot thinner.

And, as has already been noted before, it doesn't include any adjustments to revenue because of changes in yields as a result of new low fare competition in their markets.

No, I don't hate AA. I don't really care if you hate DL or not. and it doesn't in any way affect the facts or finances of the airline industry.

I am interested in talking about the bases of the airline industry based on real numbers, not emotions or likes or dislikes. If you see factual misrepresentations, feel free to call them out... but also be willing to admit the facts that are accurately presented.

AA is generating healthy revenues; I have never denied that. They are also outperforming DL and UA on RASM - but in large part because their merger partner targeted AA as their largest source of discount pricing. There also is nothing in the numbers regarding Venezuela. How long do you think that AA is going to be able to sit on $750M in unrecoverable revenue? Other int'l carriers have taken hits on revenue because of Venezuela.

And it is still easy to say how well AA is doing when they haven't incurred hardly any of the costs of the merger nor to face the changes in the competitive environment, some of which are attributable directly to the merger; AA gave up virtually its entire pre-merger DCA slot merger in order to get the merger approved and we still don't know the impact of increased LCC competition on fares - but history at DAL and other LGA/DCA markets shows that AA's HAVE BEEN REDUCED.

the linked analysis doesn't discuss that.

Now, tell me the revenue or cost challenges that other airlines face that are of a similar scale to what AA is facing... and how their debt levels compare.

I am all for AA succeeding... but we have yet to see all of the factors which I have noted factored into their performance.

when that takes place, then we can make an honest apples to apples comparison of how well AA is doing relative to other carriers.

Given that airline stocks are largely trading and not investment instruments, most analysis in the industry reflects only the present and not a look down the road to the future.

 

[Glenn Quagmire]

Had you read the analysis carefully, you would have read that AA's operating cash flow was $1.2 billion in the first quarter, not per year.
 
Given your demonstrated weaknesses with numbers, perhaps you should simply link to the report and summarize your opinions about it instead of posting inaccurate, untrue and misleading data excerpts from it.    We get it - you're rooting against AA.    I don't like Delta, but you don't find me posting false and misleading statistics about DL as often as you do about AA.    
 
You're right:  it is an excellent analysis of AA's finances - much better and more accurate than your inaccurate postings about AA's finances.   Like I posted the other day when you made up some numbers, it's become far too typical of your posts.  Your Credibility?   Zero.    
 
Here is the entire paragraph from the report:

That is why I stopped looking at any of his posts. They have been proven misleading always, and downright false many times.

And he is under the delusion that many airline analysts lurk here to read his crap.

Once again, he is proven to have no cred when it comes to these matters.

 

[commavia]

Given your demonstrated weaknesses with numbers, perhaps you should simply link to the report and summarize your opinions about it instead of posting inaccurate, untrue and misleading data excerpts from it.    We get it - you're rooting against AA.    I don't like Delta, but you don't find me posting false and misleading statistics about DL as often as you do about AA.

 
Yep.
 
"Outstanding analysis."  Meh.  Apparently cutting-and-pasting charts from other peoples' actual analyses via Google searches now passes as "analysis."
 
Before we all get so hot and bothered about AA's looming debt crisis - bankruptcy is coming, I'm sure we'll soon here - let's not forget the metric Delta itself has continually used over and over in the last few years - net debt.  That takes into account not only gross debt, but also cash, and while AA has lots of debt right now, it also has lots of cash (a this "outstanding analysis" points out).  Using Delta's own definition (calculation), Delta ended 2Q14 with about $9.1B in net debt (including $3.7B in cash and cash-equivalents).  AA, using pretty much the same calculation methodology, ended 2Q14 with about $13.5B in net debt (including $10.6B in cash and cash-equivalents).  Delta - rightfully - takes credit for reducing net debt by $7.5B since 2009, meaning their net debt level post-bankruptcy and post-merger was around $17B.  AA is already $3.5B below that and the merger closed in December.

 

[jcw]

we should convert the AA board to a DL board since we can only talk about DL on this board

 

[WorldTraveler]

yet you keep reading, Q.

what you can't ignore and neither can Q is that I argued for years about AA's declining position in NYC, its deteriorating finances which I argued justified filing for BK years ago instead of protecting shareholders, and its losses on the Pacific.

In EVERY one of these cases, I ended up being right DESPITE the heated arguments by the fAAn club to try to discredit what I was saying.

and again, Commavia, you could absolutely argue that AA was in a great position relative to DL with its debt position right now. and you can also argue about how well AA is generating cash and making comparable profits but in order to come to that conclusion, you have to ignore the MINIMUM of $1.2 billion of integration costs - and since DL and UA both blew thru way more than $1.5B in integration costs and their mergers took place years ago, the notion that AA's merger integration costs will be JUST $1.2B is more than a stretch.

and of course, it's easy to say that AA's increased debt can be covered this year without taking on debt but AA still has tens of billions of aircraft on order including what US brought to the table. AA's aircraft purchase commitments amount t billions of dollars per year.

add in revenue erosion which will come with low fare competition and the Venezuela crisis and the notions that AA can continue to generous the cash they are now - which is heavily driven by a strong revenue environment has to be viewed with suspicion.

and what I find most amazing is how you and so many members of the nAAtive mgmt fan club were so quick to show your allegiance to Horton and CO. and against Parker and yet you line up without question behind Parker.

The analysis which I linked says exactly what the DOJ noted - not me - that US' pricing policies targeted AA's network above every other.

think about and tell me why Parker did that?

did it occur to you that he did it in part because AA had the highest costs which made it the hardest for AA to defend itself?

and then consider that Parker had said for years that he wanted to merge with AA. So what did he do but do everything possible to take AA revenue away right as AA was working on a standalone emergence - which you supported.

Parker was acting like the tire store that throws broken glass, bent nails, and scrap metal all over the road in front of their store - which happens to be the only business without miles.

Parker then went into the AMR directors and told them about the revenue synergies that the merger could produce - driven to a significant degree because he was responsible for taking a great deal of it away.

no one slights AA and US for getting merger synergies based on the strength of both carrier's networks.

but what you seem unwilling to accept is that Parker and co. played a role in weakening AA's revenues and then in justifying the merger based on removing the factors which negatively affected AA.

And of course other carriers in the industry fared better - but DL and UA who were both larger than AA were not the targets of US' pricing practices to the degree that AA was.

in your haste to tell me about my inability to think thru what is going on in the industry, you might want to take a little time to think thru what actually took place between when you posted so convincingly about why a standalone AA plan made the most sense and where we are today.

 

[jcw]

we know DL rules the world and this is a DL board now

 

[commavia]

"In your haste to..." ... ah, that subtle tip of the rhetorical hat takes me back to that embarrassing lesson on goodwill from a few years back.
 
I have been for this merger from literally the day this merger proposal was announced along with the preliminary agreements between Parker and the AA unions.  Over on the other forum you were dumped from, I wrote on April 20, 2012, among other things (quoting):
 

I say good. First off, this was always inevitable - USAirways was always going to attempt a hostile takeover of AMR in bankruptcy either way, and the union agreements just add another angle.
 
Beyond that, frankly, I think this could be a big positive for lots of constituencies. The unions - and at least elements of their memberships - are obviously happy with this deal. The pilots and flight attendants appear to be the big winners here, with the TWU still bracing for some harsh reality. If the employees can walk away from this deal with a little bit more of their pay and benefits than otherwise, than fine.
 
And as for the resultant company, if it can actually be competitive and successful even with those higher labor costs (relative to the AMR term sheets), then fine. Parker and the unions are obviously banking on the scale of the combined airline to be able to finance higher labor costs. In the context of Delta and United (thus far), that would seem to be logical. From a network perspective, this airline really would be a powerhouse in many places, with an extremely strong and complimentary combined network - quite impressive. Plus, there are those 450+ new jets set to arrive over the next few years.

 
I was skeptical then, as I am now, about some of Parker's claims, cautiously optimistic about the relationships with the unions and the opportunities for synergy, and anxious about the merger's impact on preserving the historical legacy of an enterprise (American Airlines) that has had such a profound historical impact on the industry.  I also believed then, and continue to believe now, that despite the apocalyptic self-serving messaging of certain of the interests involved, AA would, indeed, have been able to survive absent a merger and that, in fact, USAirways needed this merger more than AA did.  But all of that is in the past, and the bottom line is that even with all of that, I have been - and continue to be - supportive of this merger.
 
Do yourself (and the rest of us) a favor: restrain yourself from telling others what they themselves said or wrote.  You have demonstrated time and again, whether it's accounting or other peoples' opinions, that you have absolutely no clue what you're talking about.
 
Now back to our regularly scheduled programming ...

 

[Runwaysticker]

I don't read WTs posts because the go on and on and on, Boring !!! 

 

[WorldTraveler]

then if you weren't against the merger (although saying it was inevitable hardly is an endorsement of it), there were plenty of people on here who absolutely were opposed to it in favor of Horton's team.

but rather I got right who was for or against the merger, the facts that Parker used to push AA into the merger aren't any different.

even the article which I did not write (feel free to write off Market Realist if you would like) quotes AA/US as saying that AA was the target of US' Advantage Fare pricing.

further, no one said anything about another bankruptcy but even AA's own financial statements show expenditures down the road that will soak up much of the cash they are generating.

there have been several analyses that have shown that AA is better off than UA based on current earnings in the ability to cover coming expenditures, but you cannot deny that other carriers including AK, DL, and WN are simply not spending anywhere close to the amount of money on new aircraft as AA is doing.

perhaps AA will really have costs much lower as a result but there aren't indications that the other carriers can't get to the same point using their strategies.

 

[Harold Nads]

I hope you spend your entire sunny Saturday posting and replying about whatever it is you are on about.

 

[dfw gen]

the guys an idiot read his posts for amusement.hes a wanna be.

 

[WorldTraveler]

IOW, we don't want to hear anything that could come close to challenge the well-groomed image we like to keep of ourselves.

what is it about AA's culture that makes it so incredibly hard for you to accept anything that might shine light on what you don't want to admit?

 

[jcw]

everyone on this board knows AA is second class to DL - WE GET IT