Must-know: Cost efficiency and margin improvements after merger

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Must-know: An overview of the American Airline Group (Part 7 of 12)

(Continued from Part 6)

Cost efficiency and margin improvements 

The airline industry is widely affected by fluctuating oil prices and the health of the economy. American Airline Group’s (or AAG) total operating expenses are dominated by fuel and labor cost to the extent of 57%. In spite of a 1.1% growth in fuel consumption, fuel cost decreased by 3.6% due to a 4.6% decrease in fuel price per gallon to 3.10 cents in 1Q14 from 3.25 cents in 1Q13. As of December, 2013, there were 110,400 employees—73% of them were part of unions. In 1Q14, salaries and related expense comprised 23% of the total operating expense. A rise in share price after the merger increased stock based compensation expenses. Salary also increased due to post-merger pilot negotiations and new rules on pilot and flight attendant duty times. However, in 1Q14 the total operating expense decreased by 0.3% as shown in the following table.

Profitability

After the merger, American (AAL) and U.S. Airways have both benefited from a significant improvement in margins. The combined entity’s operating margin in 1Q14 was 7.3% compared to 1.8% in 1Q13. Individually, American’s operating margin was as low as 1.2% and U.S. Airways reported a margin of 3%. Also, AAG’s net income margin improved to 4.8% as the company reported net profit of $480 million in 1Q14 compared to a loss of $297 million in 1Q13. This calculation was based on 1Q13 restated numbers to include both U.S. Airways and American Airlines results as seen in the previous table.

Excluding U.S. Airways results in 1Q13, operating income has increased more than ten times from $71 million to $730 million in 1Q14. Out of the total increase of $659 million, 27% or $179 million was due to the merger.

The trailing 12 month operating margins reported by AAG’s legacy competitors, Delta (DAL) and United (UAL), were 10.9% and 4.3%, respectively. Its low cost competitors, Jet Blue (JBLU) and Southwest (LUV), reported margins of 7.5% and 8.5%, respectively.

Continue to Part 8

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