American Airlines (AAL) plans to add 83 mainline aircraft in 2014 consisting of ten A319s, 42 A321s, three A332s, 20 B738s, two B788s, and six B773s. It plans to retire 82 older aircraft. It added one mainline aircraft to its fleet of 970 in 2013. The airline’s regional fleet is expected to increase by seven aircraft to 565 in 2014. This adds up to a net addition of eight aircraft in 2014. The company’s estimated capital expenditure for 2014 totaled $2.1 billion, out of which 1.2 billion, 57%, were related to aircraft purchase and $898 million were non-aircraft capital expenditure. This will result in an increase of 42% in available seat miles (or ASM) to 239 billion in 2014 from 168 billion in 2013. The increase in ASM will allow the airline to carry more passengers leading to increased revenue provided the load factor and yield don’t decrease.
Although all operating and performance metrics of American Airlines Group (or AAG) has shown improvement after the merger, leverage is one area that needs considerable improvement. AAG’s debt has almost doubled from $8,535 million in 2012 to $ 16,894 million in 2013 after merging. U.S Airways added $5,492 million secured debt and $551 unsecured debt in American’s debt portfolio. AAG plans an average annual principal repayment of $1.6 billion in the next five years.
It is often advantageous if a company’s capital expenditure can be financed through internal cash flows rather than through debt. AAG’s debt is already very high. In March, 2014, AAL had a cash and short-term investment balance of $10.6 billion. It had an undrawn revolving facility of $1 billion. With a total liquidity of $11.6 billion and operating cash flow of $1.2 billion in 1Q14, which is sufficient to cover the entire year’s capital expenditure of $2.1 billion, the company has the capability to expand with internal funds if everything goes favorably as in the first quarter. In addition to capital expenditure, AAG’s debt repayment burden has increased after the merger requiring an annual debt repayment of 1.6 billion.
AAL’s liquidity in 1Q14, measured as total balance sheet cash and undrawn credit facilities, as a percentage of last 12 months (or LTM) revenue was the highest among its peers at 28.4%. This was closely followed by low cost carriers, Alaska with 27.1%, Jet Blue (JBLU) with 25.8%, and Southwest (LUV) with 25.3%. It’s important to note that American is far ahead of its legacy competitors United (UAL) and Delta (DAL) with 16.7% and 14.6%, respectively, of liquidity as a percentage of last 12 month (or LTM) revenues. A higher liquidity will give American more flexibility in planning its expansion plans.