On Friday, American Airlines (NASDAQ:AAL) became the latest airline to report a record Q3 profit. A big drop in unit revenue couldn't keep American's earnings down, as it capitalized on the stunning collapse of oil prices since mid-2014. Let's take a closer look.

The earnings breakdown
Revenue at American Airlines fell 3.9% year over year last quarter to $10.71 billion, roughly in line with the average analyst estimate. A 2.9% increase in capacity was offset by a 6.8% decline in passenger revenue per available seat mile (PRASM), driven by falling ticket prices.

The PRASM declines were widespread across American's route network. It recorded double-digit PRASM declines in the Pacific and Latin America regions and mid-single digit declines in the Atlantic and domestic regions.

Airfares were down across American's route network last quarter. Photo: American Airlines

That stands in contrast to competitors like United Continental (NASDAQ:UAL) where domestic routes significantly outperformed international routes. While United's international PRASM fell 9.3% year over year in Q3, its domestic PRASM declined less than 2%. American's weak domestic PRASM has a lot to do with soaring competition in Dallas, its biggest hub market.

Fortunately, the revenue declines were more than offset by a sharp drop in American's fuel costs. The average price it paid for a gallon of jet fuel plummeted 44% year over year, from $2.98/gallon to $1.67/gallon. Fuel efficiency also improved by about 2%. Non-fuel unit costs rose by a relatively manageable 2.6% from the prior-year quarter.

Adding everything up, adjusted pre-tax income rose 55% year over year to $1.9 billion as the company's pre-tax margin expanded from 11% to 17.7%. Adjusted earnings per share soared 67% to $2.77, compared to an average analyst estimate of $2.72.

Returning even more cash to shareholders
On Friday, American Airlines also announced the third increase of the year to its share buyback program. After announcing a $2 billion share buyback program in January and doubling it to $4 billion in July, American Airlines has added another $2 billion to its repurchase authorization. That brings it to $6 billion or nearly 20% of the company's market cap.

So far, the company has been making quick work of its share repurchase authority. With the stock trading at less than five times pre-tax earnings for much of 2015, American Airlines spent $943 million on buybacks in the first half of the year and a stunning $1.56 billion last quarter.

These buybacks have significantly boosted the company's EPS growth. If American's share count had remained flat year over year last quarter -- instead it declined 7.4% -- EPS would have been $0.21 lower at $2.56.

American Airlines plans to complete the remaining $3.5 billion of share buybacks by the end of 2016. It certainly has plenty of cash to spare. American ended the third quarter with $9.6 billion in cash and investments. Even excluding restricted cash and money that is stuck in Venezuela, the company has $8.3 billion lying around.

American Airlines executives have previously stated that they planned to hold onto more cash during the integration process as a "just in case" measure. For example, United Continental -- which is roughly comparable to American Airlines in size -- ended Q3 with $5.6 billion of cash and investments.

However, American Airlines completed the biggest and most dangerous part of its integration process last week with no fiascos. That means it may be ready to draw down its cash balance to complete its buyback program in the next few quarters.

Looking ahead
American Airlines expects to continue posting strong earnings growth in the fourth quarter despite ongoing revenue pressure. PRASM is projected to decline 5%-7% in Q4, which implies only modest sequential improvements. Nevertheless, American's pre-tax margin should reach 12%-14% during the quarter, compared to 10.6% a year earlier.

The ongoing steep declines in unit revenue are clearly worrisome to many investors. However, the revenue picture will probably start improving next year. Moreover, American's management and board still appear to be extremely confident about the company's earnings power, based on the rapid pace of share buybacks. That could be enough to keep the stock on an upward path.