On Jan. 27, 2017, American Airlines Group Inc. (AAL, Financial) reported net income of $289 million and diluted earnings per share of 56 cents during fourth-quarter 2016. For full-year 2016, the Fort Worth-based airline reported $2.7 billion in net income, about $4.81 per diluted share. Even though these profit figures underperformed comparative values for 2015, the airline’s management still received top honors for their outstanding earnings performance in 2016.
Brief summary of earnings report
The airline finished 2016 with a strong fourth quarter, including operating revenues of $9.789 billion and pre-tax income of $500 million. Compared to fourth-quarter 2015 profit values, operating revenues increased $160 million while pre-tax income increased $260 million. American increased its total available seat miles (ASM) and total revenue per available seat mile (TRASM) 0.4% and 1.3% respectively, the latter representing the first year-over-year increase since fourth-quarter 2014. Even though the company’s fourth-quarter 2016 net income of $289 million significantly underperformed fourth-quarter 2015 net income, the 2015 figure included a special $3.0 billion tax deduction due to the reversal of the company’s valuation allowance. Excluding this non-cash tax deduction, fourth-quarter 2016 net income is about on par with fourth-quarter net 2015 income.
For full-year 2016, American reported $40.18 billion in operating revenue and $4.3 billion in pretax margin, underperforming comparative values for full-year 2015 by $800 million and $300 million respectively. Higher operating expenses from American’s recent labor agreements and a $57 million accrual of the profit sharing program contributed to lower operating incomes.
Company’s management praised for outstanding work
American’s management received several accolades even though the company’s performance in 2016 slightly underperformed that of 2015. CEO Doug Parker observed that “outsiders are taking notice” as American “continued to produce outstanding results in 2016.” Air Transport World, a leading global airline media brand, named American “2017 Airline of the Year” due to “phenomenal achievements” by the airline’s management team and employees during 2016.
The airline accomplished several notable events during the past year, including the first U.S. airline to offer Premium Economy service. American also added a Platinum Pro tier to its frequent flier program (AAdvantage) and additional routes to its flight network, including daily nonstop service from Los Angeles International Airport to Beijing Capital International Airport. This further expands American’s service to China in time for the 2017 Chinese New Year. Other notable achievements included two distinguished awards: Best North American Airline for the third consecutive year at the 2016 Business Traveler awards and Best Airline for Domestic First Class in Global Traveler magazine’s 2016 GT Tested Reader Survey.
Strong management does not always imply strong financial outlook
Counterintuitively, American has strong management yet an otherwise modest financial outlook for 2017. American’s financial strength ranks just 5 out of 10, with an Altman Z-score of 1.38, cash-to-debt ratio of 0.29 and interest coverage barely above Ben Graham’s required threshold of 5. Although the company paid down its long-term debt from 2006 to 2012, American has issued nearly $12 billion in debt since 2012.
Although the company has profit margins near a 10-year high, American’s per-share revenue has declined, with a five-year average per-share revenue growth rate of -22.90%. The company’s three-year revenue growth rate underperforms 94% of global airlines.
As the company has poor revenue outlook, American’s profitability ranks a 4 out of 10.
Other comments
American’s stock price dropped 4.76% from its previous close of $49.59 per share, currently trading at $47.23 per share.
Warren Buffett (Trades, Portfolio) invested in 21,770,555 shares of American during third-quarter 2016 and has the second-largest stake in the company. PRIMECAP Management (Trades, Portfolio) owns 44,295,226 shares as of the latest quarterly portfolio release.
Disclosure: No postion in American Airlines.
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