ANALYSIS: American Q1 earnings a ways off from merger targets

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American Airlines reported positive progress in its continuing financial turnaround and restructuring with its first quarter earnings today.

The Fort Worth-based carrier reported an operating profit of $52 million, reversing an $89 million operating loss during the same period in 2012. Operating revenues increased 1% to $6.1 billion and operating expenses fell 1.3% to $6.05 billion.

"The fundamental changes we have been able to achieve in streamlining our cost structure and making our operations more efficient are yielding substantial results," says Bella Goren, chief financial officer of American parent AMR, in a statement.

Were it not for $349 million in restructuring and special items expenses, American would have reported a net profit of $8 million in the quarter, it says.

"This is the first operating profit booked in a March quarter in some time - a difficult feat for AMR even in the best of times," says Michael Derchin, an analyst at CRT Capital, in a report today. He notes though that earnings were below expectations.

For an airline that is on the cusp of emerging from bankruptcy, the results are decent. Operating revenues are increasing, costs are down and passenger unit revenues are rising - all things that one would hope to see.

But the revenue expectations that American has set as part of its proposed merger with US Airways may be overly- optimistic, say some analysts.

"A 1% revenue increase doesn't really get to the $3.1 billion [additional] operating revenues [by 2017] in the plan of the reorganisation," says Helane Becker, an airline analyst at Cowen Securities. "I'm just curious how they get from there, from A to B."

American and US Airways anticipate that they will generate nearly $41 billion in operating revenue this year, according to recent filings with the bankruptcy court and US Securities and Exchange Commission (SEC). This represents a 5.9% increase over their combined operating revenues of $38.7 billion in 2012.

The carriers predict that operating revenue will grow an additional 16.7% to $47.8 billion by 2017 compared to 2013, or a 3.9% compound annual growth rate based on Flightglobal calculations, in the filings. This includes $900 million in expected revenue synergies from their proposed merger.

These are not necessarily unreasonable expectations. Last year, American's operating revenue grew by 3.7% to $24.9 billion and US Airways by 5.9% to $13.8 billion.

But American is not off to a strong start. The 1% increase in operating revenue during the first quarter pales to the 9.1% increase it realised during the same period in 2012. Passenger revenue per available seat mile (PRASM) growth mirrored this trend rising only 2.6% this past quarter versus 10.3% last year.

American declines to comment on its revenue projections.

US Airways may not be doing much better. While it has yet to release its first quarter results - these are due on 23 April - its PRASM growth during the first three months of the year has been poor compared to 2012. PRASM was flat in March, up 1% in February and 3% in January versus increases of 8% in March 2012, 7% in February 2012 and 10% in January 2012.

The airline attributes its lower than expected March performance to the impact of US federal government budget cuts called the sequester and its February performance to the lingering impact from superstorm Sandy that hit the US coast in October 2012.

US Airways has a large focus city at Ronald Reagan Washington National airport, which serves to the US capital, and a hub at Philadelphia International airport.

The carrier reported a 10.3% increase in operating revenue on an 8.2% increase in PRASM during the first quarter of 2012.

"You just don't get to $41 billion in revenue on a combined basis with $6.1 billion in revenue in the first quarter," says Becker. However, she adds that the first quarter is the worst to look at on an annualised basis.

Whether or not first quarter performance can be extended to the rest of the year, economic headwinds stand in the way of American and US Airways meeting their revenue goals. The sequester cuts are likely remain in place through the end of September and, according to the International Monetary Fund (IMF), US economic growth is expected to be below the 2.2% growth that was reported last year.

"Being able to predict [revenue] to the nearest one to two percent is just not possible in this business," says another airline industry analyst. A judgement cannot be made one way or another on American's revenue projections, they add.