$70 Million A Day Cash Burn And No Demand: Can American Airlines Stock Recover From Here?

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American Airlines

American Airlines’ stock (NYSE:AAL) has dropped a massive 65% this year. No surprises there. Air travel is down 90%, Q1 2020 losses totaled $2.2 billion, and a cash burn of nearly $70 million a day is putting pressure on liquidity. It is a matter of survival now. Anyone who is holding American Airlines’ stock or thinking of investing must be asking – can the stock recover after such a gigantic fall? It can, and it will, but the recovery trajectory is debatable.

The stock movement will be governed by 2 factors: the pace at which demand recovers, and whether American Airlines can stay liquid until revenues start flowing in meaningfully. We consider two scenarios of demand recovery to understand cash flow pressure to assess how well-prepared the company is to handle the crisis from a liquidity standpoint. In a pessimistic case where demand recovery is highly attenuated by Q4 due to a large reduction in non-essential travel and pull back in discretionary spending, American Airlines could post a huge annual loss in excess of $5 billion and face net cash outflow of over $4 billion. Luckily, with government support and its existing cash cushion, it should be able to cover this outflow. Our dashboard Does American Airlines Have Enough Liquidity To Survive Covid-19 Demand Shock examines the company’s cash flow generation ability and financing requirements in two different demand recovery scenarios. 

 

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Case One: Covid-19 Demand Recovers Completely By Q4

We characterize this case with a 30% decline in annual revenue and a 50% cut in capital expenditures over 2019 figures. This essentially means Q3 and Q4 making up for a significant amount of losses incurred in the first two quarters. We further assume that American Airlines will suspend any planned share repurchase, which makes sense from an investor standpoint as well. In this case, while net losses could reach $2.4 billion, the company will face net cash outflow of a similar amount ($2.4 billion) if we assume capital expenditure can be brought down to $2.1 billion (half of 2019 value).

 

You think that’s bad? Consider a grimmer scenario below.

Case Two: Highly Attenuated Demand Recovery As Travel Remains Low On Priority

This is a much more worrying scenario. Even if the pandemic is controlled by the fourth quarter, consumers could still continue to stay put and push back all non-essential travel plans, resulting in very attenuated demand recovery. Even business could maintain the status quo to some extent – collaborating online instead of setting up in-person meetings, which can result in a slower recovery in business travel. We characterize this scenario with a 50% decline in revenue and a 70% cut in capital expenditures.

In this case, American Airlines could end up burning nearly $4.3 billion in cash, even if it reduces its capital expenditure by almost 70% (to just $1.3 billion).  But don’t worry yet, American Airlines has built up enough cash cushion and its liquidity is stabilizing! What stands out is nearly $5.8 billion in payroll expense support from the government, and an additional $2 billion raised from other sources. In addition, the company will receive additional money under an aid program.

 

So American Airlines needs a lot of money to survive. But what about its peers? You’ll be surprised to see how comparatively well-prepared Delta Airlines is to handle the demand slump despite having a similar revenue base.

 

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