Just How Solid Is American Airlines' First Operational Report?

American Airlines generates solid numbers for the first month after the merger suggesting continue load factor increases will push the stock up to combat Delta Air Lines for the largest market cap.

Jan 17, 2014 at 11:31AM

After recently finalizing the merger between U.S Airways and AMR Corp., the December traffic results were the first operational release of the new American Airlines Group (NASDAQ:AAL). Investors were naturally able to add the individual traffic numbers together, but this release provides more convenience and gave a glimpse to whether the merger is already providing any benefits.

Considering both that Delta Air Lines (NYSE:DAL) and United Airlines (NYSE:UAL) had already provided traffic results for December, some of the positive numbers weren't a surprise. Investors need to recall that November's numbers were weak due to the return trip from the Thanksgiving holiday. The associated revenue and traffic numbers were counted for December.

First combined results
During December, the US Airways traffic results were the most impressive of the major airlines with passenger revenue per available seat mile, or PRASM, soaring 12% versus the same period last year. This number outshined the solid 9% gain from American Airlines. American Airlines generated the higher load factor gains during December, up 3.1 points versus December 2012.

With US Airways leading the way with 7% growth in revenue passenger miles, or RPMs, the new American Airlines Group averaged a solid 5.7% gain to reach 18.1 billion RPMs. The combined available seat miles, or ASMs, grew only 1.9% over last year to reach 21.7 billion miles due to limited 1.1% capacity growth from the larger American Airlines. The combination of higher RPMs and nearly flat ASMs increased the load factor to reach 83.8% during December.

These numbers are very important for airlines. The higher passenger revenue while also increasing capacity is a great sign that the company is generating higher fares and margins.

Surging United Airlines
United Airlines estimated that PRASM increased around 12% due partially to cancelling 1,200 flights for weather-related reasons that reduced capacity and increased yields. The company also recorded some other one-time benefits that combined increased December PRASM by 2.5 percentage points. It is unclear whether the other airlines benefited in a similar manner.

What investors can tell is that RPMs gained 4.1% on a capacity increase of only 0.5% versus December 2012. While United Airlines surged on this news, all of the numbers were slightly below those generated by American Airlines during a period it focused on finalizing a merger.

The total RPMs of 16.9 billion and ASMs of 19.8 billion are not surprisingly smaller than the new American Airlines, but the load factor of 85.4% is solidly higher than the 83.8% generated by the largest airline. United maintained a substantially larger international base with RPMs 1.1 billion higher than American Airlines. American is very dominant domestically compared to United.

Delta executes again
Delta Air Lines reported that PRASM increased 10% year over year during December. The solid gains were backed up by a 6.9% increase in RPMs and a 3.8% jump in capacity. Clearly, the weather issues that held back capacity at United Airlines didn't impact Delta or US Airways to the same degree. The load factor only gained to 85.2%, but the 2012 number was already a solid 82.7%.

The total RPMs of only 15.7 billion and ASMs of 18.5 billion highlight that Delta is now a distant third in traffic size. The new American Airlines is 15% larger when it comes to passenger miles. Again, Delta has a slightly larger international presence than American, but the new combined network swamps it domestically.

Bottom line
While these monthly traffic reports only tell half the story on these airlines, the impressive PRASM numbers for the month of December were enough to push the companies' stocks to record highs. The merger was finalized on Dec. 9, so the 2014 reports will be telling about whether or not American can improve the load factor that is lacking among the group.

The real key will be marrying these traffic gains with contained cost growth in order to generate solid operating margin gains. Based on these increases in PRASM, American appears cheaper than Delta.

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