American Airlines' 1Q15: A Mixed Bag (Part 5 of 5)
Drop in crude prices
American Airlines (AAL) expects to decrease its 2015 fuel bill to $4.35 billion year-over-year. The company’s fuel cost per gallon is expected to be in the range of $1.89–$1.94. This should result in a significant increase in operating cash flow for AAL. The company’s free cash flow for the year is expected to be ~$3,049 million.
Fuel costs per gallon for American Airlines’ peers in 1Q15 were:
-
Alaska Airlines (ALK): $1.97
-
Delta Air Lines (DAL): $1.99
-
JetBlue Airways (JBLU): 2.06
-
United Continental (UAL): $2.08
-
Spirit Airlines (SAVE): $2.61
-
Virgin America (VA): $2.93
Investments and expenditures
American Airlines expects to use this increased cash flow to reduce debt by $2.1 billion in 2015. Additionally, total capital expenditures should be ~$5.4 billion, of which $1 billion will be for non-aircraft expenses.
Fleet upgrades and maintenance
American Airlines (AAL) plans to renew its fleet in order to improve fuel efficiency. The company plans to take delivery of 55 mainline aircraft and 38 regional aircraft in 2015, and it plans to retire 73 of its mainline aircraft and 17 regional aircraft. AAL restructured the delivery schedule of its Boeing 787 aircraft with The Boeing Company (BA) to manage its system capacity.
The delivery of five 787 aircraft, originally scheduled for 2016, was restructured so that four aircraft will be delivered in 2017 and one will be delivered in 2018. This restructured delivery schedule is expected to reduce the system capacity by 0.6% and its wide-body capacity by ~2.5%. It will also reduce AAL’s capital expenditures in 2016.
Upbeat on capacity
American Airlines is optimistic on its increase in capacity, with capacity growth expected to be 2%–3% in its domestic markets and ~1% in its international markets. These mainline average seat miles (or ASM) are expected to break down as $61.9 billion in 2Q15, $63.7 billion in 3Q15, and $58.9 billion in 4Q15. The regional capacity breaks down as $7.6 billion in 2Q15, $8 billion in 3Q15, and $8.1 billion in 4Q15.
Forecasting CASM
American Airlines expects its total cost per available seat mile (or CASM), without special charges and fuel, to be up by ~4% due to investment in new aircraft, new labor contracts for flight attendants and pilots, and costs for improving operational efficiency.
The mainline CASM is expected to be up by ~3%–5% in 2015. Regional CASM, excluding special items and fuel, is expected to decrease by 1%–3%.
Downsizing Latin American market capacity
The demand for air travel from Latin American markets continues to weaken and is expected to impact revenues in the coming quarters. Demand has been significantly affected in Brazil and Venezuela. American Airlines has taken measures to deal with the decrease in demand by cutting the capacity in Brazil by 20% and the capacity in Venezuela by more than 70%.