Must-know: An overview of the American Airline Group (Part 6 of 12)
American-U.S. Airways merger has positive revenue
American Airlines merged with U.S. Airways in December, 2013. It reported its 1Q revenue as a combined entity in 2014. The merged entity started its first quarter results with a positive note—a 5.6% growth in operating revenue. This growth was driven by revenue growth in all three segments—a 5% growth in passenger and cargo segment revenue and a 10% growth in other revenue segments. This is growth in 1Q14 calculated on the combined financial results of U.S. Airways and American for 1Q13. Excluding U.S. airways in 1Q13, revenue increased from $6,098 million in 1Q13 to 9,995 million in 1Q14—representing a 64% growth. Out of the total increase of $3,897 million in revenue, $3,509 million—or 90%—was due to the merger. As a result, 57% of the increase in total revenue was due to the merger.
Revenue increased despite the cancellation of more than 34,000 flights due to severe weather conditions—the revenue loss of which was estimated as $115 million. All airlines in the U.S. were adversely affected by the severe weather conditions which resulted in the highest number of cancellations in the U.S. airline industry in 25 years in February, 2014.
The breakdown of American Airlines Group (AAL) revenue by segments is similar for its competitors United (UAL) and Delta (DAL). However, Southwest Airlines (LUV) and Jet Blue (JBLU) have a higher percentage of passenger revenue—LUV with 94% and JBLU with 91%.
Key revenue drivers
Passenger revenue is calculated as—revenue passenger miles x yield
Passenger revenue is the main source of revenue comprising 86% of AAG’s total revenue. The 5% growth in passenger revenue was primarily due to a 3.2% growth in yield. The second revenue driver—revenue passenger miles (RPM) calculated as available seat miles x load factor—also increased by 1.7%. It was driven by an increase in available seat miles (ASM), although load factor decreased due to flight cancellations. ASM is the capacity of an airline in terms of the number of seats. Load factor is capacity utilization measured as number of seats occupied out of the total available seats. While the RPM caters to demand for travel by making the seats available, yield is the outcome of the demand-supply gap. The higher the demand compared to supply, the higher the yield will be.
Cargo revenue is calculated as—cargo ton miles x cargo yield per ton mile
The 5% growth in cargo revenue was driven by a 12% increase in cargo ton. Cargo ton mile is measured as the number of cargo tons transported x distance traveled, or the number of miles. It was driven by increased freight volumes in the transatlantic region. However, the high growth of cargo volumes was slightly offset by a 6% decrease in cargo yield per ton mile—measured as cargo revenue divided by the cargo ton miles.
Other revenue is revenue generated from the frequent flyer program, ticket change fees, excess baggage fees, first and second bag fees, and contract services. It accounts for 11% of American Airlines Group’s (or AAG) total revenue. In 1Q14 revenue from this segment increased by 10%. It was driven primarily by revenues from the frequent flyer program.
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