American Airlines Earnings: More bad news
Almost every major airline has been hit hard by the COVID-19 pandemic this year. But in the US, industry laggards American Airlines (EEL 2.39%) Has struggled more than its competitorsdue to high interest and rental costs as well as strategic missteps.
American’s third-quarter earnings report revealed that the airline’s underperformance continues — and that’s bad news for investors. Let’s take a look.
Adding capacity didn’t help burn the cash
As I noted in mine result previewAmerican Airlines restored capacity faster than its competitors Delta Airlines (DAL 1.90%) and United Airlines (UAL 3.78%) this summer. That was a risky bet on the pent-up demand that led to a large sequential improvement in domestic air travel during the traditional holiday season. Unfortunately for American and its shareholders, demand has recovered at a very modest pace from its April trough.
As a result, daily cash burn in the third quarter averaged $44 million per day. That was even worse than American Airlines’ guidelines had implied.
That cash burn number was also worse than Delta and United. Excluding severance and principal repayments, American burned $36 million per day last quarter, compared to $24 million per day for Delta and $21 million a day for United.
Not surprisingly, American Airlines’ adjusted pre-tax loss of $3.6 billion also topped those of Delta Air Lines ($2.6 billion) and United Airlines ($3 billion). Remarkably, it lost more money and burned more money than Delta and United, despite making about 25% more revenue than them. (This just goes to show how American’s plan to quickly restore capacity to meet summer demand backfired.) Still, these numbers matter less than cash burn in the current environment.
A mixed outlook
American Airlines’ outlook for the fourth quarter was also somewhat disappointing. The company expects to average $25 million to $30 million in daily cash burn, with $8 million of that daily cash burn coming from severance and debt repayments. This is roughly in line with United’s cash burn forecasts. However, it’s worse than Delta’s projected scenario, which calls for a drop in daily cash burn (excluding severance pay and debt repayments) from $18 million last month to about $10 million by December.
It’s also important to note that American had to furlough a significant portion of its workforce just to come close to matching its workforce Competitors to full-service airlines burn cash. United has furloughed fewer workers, and Delta hasn’t furloughed anyone to date. Recalling and retraining furloughed workers (particularly pilots) will impose additional costs on American Airlines over the next few years.
drowning in debt
American Airlines ended the last quarter with $13.6 billion in cash, including $8.3 billion in unrestricted cash and short-term investments. There is therefore no immediate risk of bankruptcy. However, as of Sept. 30, it also had $47.5 billion in debt, lease and pension liabilities. That number is expected to be well over $50 billion by early next year as American draws on subsidized secured loans from the federal government.
Management says that if demand picks up over the next few years, American will be able to start paying down debt quickly, particularly because it has scaled back its near-term investment plans. However, there’s a good chance the company won’t be cash flow positive again until 2022. Also, it will eventually need to replace the nearly 100 mainline aircraft it retired this year, along with more than 200 others that are currently about 20 years old. That will force it to ramp up capital expenditure (capex) again soon (though not to the levels of a few years ago).
In short, American Airlines will be operating with a ton of debt for the foreseeable future, with billions of dollars maturing each year. Because it’s unlikely to generate enough cash to pay all of its debt due, some will need to be refinanced — potentially at significantly higher interest rates. (American issued secured debt at a 10.75% interest rate last month; earlier this year it was able to issue unsecured debt with a coupon of just 3.75%.)
Furthermore, if the US debt burden remains high in the next downturn, creditors could lose patience. Until the airline makes significant progress on its debt-reduction goals, investors should avoid American Airlines stocks.