Last week, American Airlines (NASDAQ:AAL) officially became the first of the U.S. legacy carriers to return to unit revenue growth. The company reported that revenue per available seat mile (RASM) increased 1.3% year over year in the fourth quarter. Passenger revenue per available seat mile (PRASM) -- which excludes cargo revenue, baggage fees, and other non-ticket revenue -- rose 0.2%.
Meanwhile, unit revenue declined last quarter at American's two main competitors, Delta Air Lines (NYSE:DAL) and United Continental (NASDAQ:UAL). However, only a small portion of this discrepancy reflects fundamental outperformance by American Airlines.
Instead, American Airlines' strong unit revenue trend primarily reflects its outsized presence in Brazil. Moreover, the company's big revenue gains in that market are just offsetting equally enormous declines suffered in 2015.
Unit revenue rises
Early in the fourth quarter, American Airlines didn't expect to return to unit revenue growth until 2017. In October, the company projected that RASM would decline 1% to 3% in Q4.
However, revenue trends improved sharply as the quarter progressed, particularly following the presidential election. As a result, by early January, American had raised its unit revenue forecast by 3 percentage points. As noted earlier, RASM ultimately rose 1.3%, while PRASM increased 0.2%. (The difference between the two figures was driven by a sharp increase in revenue from American Airlines' new co-branded credit card agreements.)
Delta Air Lines and United Continental both posted notably worse revenue performances. PRASM declined 1.6% year over year at United and declined 2.7% year over year at Delta.
It's all about Brazil
Looking at American Airlines' revenue results on a regional basis, it's clear that Brazil played a huge role in its return to unit revenue growth. In the domestic market, PRASM was roughly flat (up 0.3% year over year). Meanwhile, PRASM declined 7.7% and 4.9% in the transatlantic and transpacific markets, respectively.
The main source of unit revenue growth was Latin America, where PRASM rose 10.2% year over year. And while several different markets within Latin America posted unit revenue growth, Brazil drove the bulk of the gain with a massive 53% increase in PRASM.
The huge gains in Brazil don't reflect strong demand there as much as abysmal demand a year earlier. Indeed, American Airlines executives noted that the company's unit revenue last quarter for routes to Brazil was still down relative to Q4 2014.
The rebound in demand is disproportionately benefiting American Airlines because of its large footprint in Brazil. Indeed, as I noted last year, American carries about twice as much traffic to Brazil as Delta and United combined.
Adjusting for geographic concentration, American Airlines and United Airlines probably would have reported similar unit revenue trends last quarter -- with Delta not far behind.
Show me the money
American Airlines' results weren't very impressive from a profitability perspective, either. The company's Q4 adjusted pre-tax income sank by more than $500 million year over year, reaching $773 million. While that was better than the company's initial guidance, Delta and United both posted higher pre-tax profits last quarter.
Looking ahead to the first quarter, American Airlines expects its unit revenue trajectory to improve further, with RASM up 2.5% to 4.5% year over year. Routes to Brazil will continue to generate outsize gains, although domestic revenue trends are also strengthening.
Nevertheless, American Airlines forecast that its pre-tax margin will be just 3% to 5% in Q1, down from 12.9% a year earlier. Sharp cost increases are exceeding unit revenue growth by a wide margin. American's margin guidance is better than the 0.5% to 2.5% increase that United Continental expects, but far short of Delta Air Lines' projected double-digit pre-tax margin.
The unit revenue recovery in Brazil -- and, to a lesser extent, other markets -- is allowing American Airlines to stay profitable despite the impact of rising fuel and labor costs. But with earnings on the decline, debt on the rise, and a profit margin that remains far lower than top rival Delta Air Lines, investors shouldn't get too excited about American Airlines yet.