American Airlines (AAL 1.03%), the largest airline in the world, reported on Friday that it earned yet another record profit last quarter. Like peers Delta Air Lines (DAL 1.55%) and United Continental (UAL 0.96%), American Airlines has been benefiting from low oil prices while simultaneously facing revenue pressure in multiple regions of the world.
In fact, American Airlines has been the hardest hit by unit revenue declines in recent quarters. But it has also seen the biggest fuel cost benefit, thanks to CEO Doug Parker's savvy move to stop its fuel-hedging program.
American's quarter, by the numbers
American Airlines' revenue last quarter fell 4.6% year over year to $10.83 billion. This just missed the analyst consensus of $10.86 billion.
The company's adjusted pre-tax margin increased by 4.4 percentage points year over year -- thanks to a 37% year-over-year decline in the average fuel price paid -- reaching a new record of 17.2%. This led to a record adjusted profit of $1.85 billion, good for EPS of $2.62. That edged in just ahead of the average analyst estimate of $2.60.
But American Airlines had been expecting an even better performance at the beginning of the quarter. In April, it had projected that its pre-tax adjusted margin would reach 18%-20%. At that time, analysts expected that EPS would hit $3.20. Weakening unit revenue trends and an increase in fuel prices during the quarter accounted for the discrepancy.
Passenger unit revenue, or PRASM, declined 6.9% last quarter. That was worse than the 4%-6% decline that American had originally projected, but right in the middle of its updated forecast for a 6%-8% decline. In the Pacific and Latin America regions, PRASM fell by double digits.
More of the same
American Airlines posted better results than top competitors Delta and United last quarter. Delta Air Lines had the lowest PRASM decline, at 4.6%, but it also faced the biggest fuel hedging losses. As a result, its pre-tax margin only increased by 1.8 percentage points.
Meanwhile, PRASM declined 5.6% at United Continental, putting it between its two rivals. Its pre-tax margin expanded by 3.8 percentage points year over year as its fuel hedging losses were smaller than Delta's.
American's performance last quarter shows just how important its decision to drop fuel hedging was. Despite having a weaker revenue performance than Delta or United, it delivered the most margin expansion and earned the highest profit margin among them.
American Airlines still faces patches of demand weakness across the world, as well as increased price competition in the U.S. As a result, it expects PRASM to decline 6%-8% again this quarter. Nevertheless, it expects to earn another record quarterly profit, especially as fuel prices have started to fall again. For Q3, American forecasts a pre-tax margin of 16%-18%, up from 11% a year earlier.
The revenue picture could start to improve this fall as American Airlines plans to complete the biggest step of its merger integration -- moving to a single reservation system -- in October. This will allow the company to start fine-tuning schedules and capacity levels of the combined airline to maximize revenue. The biggest share of the resulting synergies will come in 2016, though.
In the meantime, American Airlines plans to continue buying back stock at a breakneck pace, as its stock remains extremely cheap. The company spent $753 million on buybacks last quarter, and on Friday the board added another $2 billion to the $2 billion repurchase program it authorized in January. It plans to complete the whole $4 billion buyback by the end of 2016, representing another lever for EPS growth.