AALAmerican Airlines Group Inc (NASDAQ:AAL) reported its third quarter 2016 results. The Company’s third quarter highlights include:

  • Third quarter 2016 pre-tax profit of $1.2 billion, or $1.5 billion excluding special charges, and net profit of $737 million, or $933 million excluding special charges
  • Third quarter 2016 earnings per diluted share was $1.40 versus $2.49 for the same period last year. Third quarter 2016 adjusted1 earnings per diluted share was $2.80 versus $2.77 for the third quarter 2015
  • As part of its profit sharing plan, the Company accrued $86 million in the third quarter. This brings the year-to-date accrual for profit sharing to $257 million
  • Returned $669 million to stockholders through share repurchases and dividends in the third quarter
  • Successfully completed the Company’s largest IT cutover since the merger with no disruption to service

The Company reported a Generally Accepted Accounting Principles (GAAP) net profit of $737 million, or $1.40 per diluted share in the third quarter 2016. This compares to a GAAP net profit of $1.7 billion in the third quarter 2015, or $2.49 per diluted share. As a result of the reversal of the valuation allowance on the Company’s deferred tax assets as of December 31, 2015, the Company’s 2016 results include a $452 million provision for income taxes at an effective rate of approximately 38 percent, of which $449 million is non-cash due to net operating loss utilization. There was no tax provision for federal income taxes recorded in 2015.

The impact of the year-over-year change in non-cash income tax expense is removed by comparing pre-tax income. The Company reported a third quarter 2016 GAAP pre-tax income of $1.2 billion, and pre-tax income excluding net special charges of $1.5 billion. This compares to a third quarter 2015 GAAP pre-tax income of $1.7 billion, and pre-tax income excluding net special charges of $1.9 billion.

Adjusted1 third quarter 2016 earnings per diluted share was $2.80, up from $2.77 per diluted share in the third quarter of 2015.

“These outstanding results are due to the efforts of our more than 100,000 team members, who are working tirelessly to improve our operations, product, and customer experience,” said Doug Parker, Chairman and CEO. “Nowhere are these efforts more evident than through the seamless completion of our largest IT cutover yet, which combined our fleet and pilot groups onto one system, with no disruption to service. We’re already seeing the benefits as this cutover enables us to schedule our pilots and aircraft as one airline and allows us to further optimize our network to better meet the needs of our passengers.”

“With integration successes like this behind us, we are even more excited about the future.  We are investing in our people and our product and are well along the path to restoring American as the greatest airline in the world.”

Third Quarter 2016 Highlights 

           
  GAAP   Non-GAAP
    3Q16     3Q15       3Q16     3Q15  
           
Total operating revenues ($ mil) $  10,594   $  10,706     $  10,594   $  10,706  
Total operating expenses ($ mil)     9,163       8,707         8,869       8,542  
Operating income     1,431       1,999         1,725       2,164  
           
Pre-tax income ($ mil)     1,189       1,709         1,483       1,895  
Pre-tax margin   11.2 %   16.0 %     14.0 %   17.7 %
           
Net income ($ mil)     737       1,693         933       1,885  
           
Earnings per diluted share $   1.40   $   2.49     $   1.76   $   2.77  
Adjusted 1 earnings per diluted share   n/a     n/a     $   2.80   $   2.77

Revenue and Cost Comparisons

Total revenue in the third quarter was $10.6 billion, a decrease of 1.1 percent versus the third quarter 2015 on a 1.2 percent increase in total available seat miles (ASMs). Total revenue per ASM was 14.73 cents, down 2.2 percent versus the third quarter 2015. This decrease was due to competitive capacity growth, continued macroeconomic softness outside of the United States, and foreign currency weakness.

Total operating expenses in the third quarter were $9.2 billion, up 5.2 percent compared to the third quarter 2015, due primarily to a 15.3 percent increase in salaries and benefits expense, which includes the impact of the Company’s recent labor agreements and an $86 million accrual for the Company’s profit sharing program.

Third quarter mainline cost per available seat mile (CASM) was 11.96 cents, up 5.6 percent on a 0.5 percent increase in mainline ASMs versus the third quarter 2015. Excluding fuel and special charges, mainline CASM was 9.32 cents, up 8.9 percent versus the third quarter 2015. Regional CASM was 18.85 cents, down 5.2 percent versus the third quarter 2015 on a 6.9 percent increase in regional ASMs. Excluding fuel and special charges, regional CASM was 15.08 cents, down 4.5 percent versus the third quarter 2015.

Fleet

As part of the Company’s ongoing fleet renewal program, the Company invested $1.0 billion in new aircraft during the third quarter, including 12 new mainline aircraft and 9 new regional aircraft, while removing 49 aircraft from the fleet. With an average mainline aircraft age of 10 years, the Company operates the youngest fleet of the four largest U.S. carriers.

Liquidity and Capital Return Program

As of September 30, 2016, the Company had approximately $9.2 billion in total available liquidity, consisting of unrestricted cash and short-term investments of $6.8 billion and $2.4 billion in undrawn revolver capacity. The Company also had restricted cash of $635 million.

The Company returned $669 million to its stockholders in the third quarter through the payment of $53 million in quarterly dividends and the repurchase of $616 million of common stock, or 18.2 million shares, at an average price of $33.87 per share. The Company has returned more than $9.0 billion to stockholders through share repurchases and dividends since mid-2014.

Share repurchases under the buyback programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. The programs do not obligate the Company to repurchase any specific number of shares or continue a dividend for any fixed period, and may be suspended at any time at the Company’s discretion.

The Company also declared a dividend of $0.10 per share to be paid on November 21, 2016, to stockholders of record as of November 7, 2016.

Notable Accomplishments

Integration Accomplishments

  • On Oct. 1, the Company smoothly integrated all 15,000 American Airlines pilots and its mainline fleet into a single scheduling system, a crucial step in unlocking the full potential of the Company’s network and airline. The successful completion of this company-wide project allows the Company to schedule pilots and aircraft seamlessly regardless of which pre-merger airline they came from. It will also allow pilots to receive the full benefits of their single seniority list and joint collective bargaining agreement
  • Reached an agreement with the TWU-IAM Association for pay increases for mechanics, fleet service and other employees while negotiations continue for a full joint collective bargaining agreement. In September, the Company and the TWU-IAM Association reached a tentative agreement on a new joint collective bargaining agreement for flight simulator engineers
  • Debuted new uniforms for 80,000 flight crew members, mechanics, and employees at airports, clubs and lounges
  • In October, reached an industry-leading tentative agreement with the Transport Workers Union for a new joint collective bargaining agreement covering flight crew training instructors and simulator instructors

Finance, Marketing, and Network Accomplishments

  • Announced new agreements with partners Citi and Barclaycard US to extend their relationships, as well as a new, long-term exclusive agreement with MasterCard, to provide AAdvantage® miles and other benefits to customers
  • Took delivery of the Company’s first Boeing 787-9 aircraft, the first of four 787-9s expected to be delivered this year. These aircraft are the first at a U.S. airline to offer Premium Economy seating, a new class of service on international flights with more legroom and wider seats. International service on these aircraft begins Nov. 3 to Sao Paulo and on Nov. 4 to Madrid
  • Launched several financing transactions during the quarter, including the $814 million 2016-3 Enhanced Equipment Trust Certificates, which consists of both AA and A tranches, and re-priced the Company’s 2014 Credit Facilities, which reduced the interest rate by 25 basis points
  • Launched new nonstop service between Los Angeles International Airport and Hong Kong on Sept. 7
  • The U.S. Department of Transportation tentatively awarded American a slot pair for service between Los Angeles International Airport and Tokyo Haneda, allowing American to shift its service to more favorable daytime hours
  • Expanded complimentary in-flight entertainment offerings to include premium movies, TV shows, music and games in the Main Cabin on all domestic flights with seatback entertainment and wireless streaming entertainment, giving customers unrestricted access to the largest content library among the U.S. carriers from their seatback entertainment system or their own device
  • Began the Company’s first-ever regularly scheduled flights to Cuba on Sept. 7 with nonstop service from Miami to Cienfuegos and Holguin. Havana service begins in November
  • Reopened the Company’s London Heathrow Arrivals Lounge following a multi-million dollar refurbishment that radically changed the overall look and ambiance of the facility. The lounge now features 29 top-notch shower rooms, a business center and meeting room. The Company also re-opened its new Admirals Club lounge at Rio de Janeiro airport
  • Announced that the Company’s new campus would be named after former Chairman and CEO Robert Crandall

Community Relations Accomplishments

  • Received the top score of 100 on the 2016 Disability Equality Index® and was named a “2016 DEI Best Places to Work”
  • Participated in the “Stand Up To Cancer” telecast, which was broadcast live on all major networks and more than 50 cable channels. Funds raised during the broadcast will further groundbreaking research to turn more patients into survivors
  • Honored four employee recipients of the eighth annual Earl G. Graves Award for Leadership in Inclusion and Diversity
  • Announced a multi-year financial commitment of $1 million to the Answer ALS research project to help end amyotrophic lateral sclerosis
  • Brought 180 World War II, Korean and Vietnam War veterans from Asheville, N.C. to Washington D.C. to spend the day at the memorials to those wars. The flight marked both the 10th anniversary of American’s partnership with the Honor Flight Network and American’s 500th Honor Flight since the first one arrived in Washington in 2006
  • Launched a partnership with TurboVote, a non-partisan, nonprofit organization that assists in voter registration, to help its U.S. employees register to vote

Special Items

In the third quarter, the Company recognized $294 million in net special charges before the effect of income taxes, principally consisting of merger integration expenses relating to re-branding of aircraft, airport facilities and uniforms, information technology, alignment of labor union contracts and fleet restructuring. (Original Source)

Shares of American Airlines are up nearly 2% to $41.48 in pre-market trading Thursday. AAL has a 1-year high of $47.09 and a 1-year low of $24.85. The stock’s 50-day moving average is $37.20 and its 200-day moving average is $34.81.

On the ratings front, American Airlines has been the subject of a number of recent research reports. In a report issued on October 10, Credit Suisse analyst Julie Yates maintained a Sell rating on AAL, with a price target of $36, which represents a potential downside of 11% from where the stock is currently trading. Separately, on September 21, Raymond James’ Savanthi Syth downgraded the stock to Hold.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Julie Yates and Savanthi Syth have a total average return of -4.4% and 5.9% respectively. Yates has a success rate of 35% and is ranked #3672 out of 4180 analysts, while Syth has a success rate of 49% and is ranked #864.

The street is mostly Bullish on AAL stock. Out of 10 analysts who cover the stock, 5 suggest a Buy rating , 3 suggest a Hold and 2 recommend to Sell the stock. The 12-month average price target assigned to the stock is $42.67, which represents a potential upside of 5% from where the stock is currently trading.

American Airlines Group, Inc. is a holding company whose business activity is the operation of a network carrier through its principal wholly-owned mainline operating subsidiary, American. The company provides air transportation for passengers and cargo. It cargo division provides a range of freight and mail services, with facilities and interline connections available across the globe.