American Airlines Will Survive, But Can It Thrive?

With air traffic gradually picking up and the Federal government firmly supporting airline companies, does American Airlines (NASDAQ:AAL) stock – which remains down by over 55% this year – look attractively valued? Not really, in our view. We think American Airlines could underperform its peers, on account of its weaker balance sheet and operating performance and also considering the stock’s slower recovery post the 2008 crisis.

Stock Price Movement & Comparing With 2008 Crisis

American Airlines’ stock trades at about $13 currently and has lost about 55% in value year-to-date, as demand for air travel declined sharply due to the Covid-19 outbreak. American traded at a pre-Covid high of about $28.50 in February and is currently 54% below this peak level. The stock has recovered 26% from the low of a little over $10 seen in March 2020, driven by the government’s multi-billion-dollar bailout package for airlines and a gradual re-opening of the economy.

Looking at the airline’s performance during the 2008 crisis should also give investors a perspective of how the stock has rebounded from major sell-offs in the past.  The stock fell from about $26 in October 2007 to a low of about $2.70 in March 2009 – losing about 90% of its value. While the stock recovered considerably within a year – rising by over 70% from the March 2009 lows of $2.70 to about $4.60 in January 2010, it only returned to its pre-crisis levels of over $28 in 2014, following the merger with the U.S. Airways group. See our dashboard How American Airlines Performance Over Covid-19 Compares With 2008 Crisis

Survival Prospects Compared To Rivals

Q2 2020 was a rough quarter for American Airlines, with Revenue down by 86% year-over-year to about $1.6 billion and net losses coming in at about $2 billion. While demand has been picking up in recent months (with air passenger traffic in early September almost doubling compared to levels seen in early June) investors need to gauge whether American Airlines has adequate liquidity to survive a prolonged pandemic or perhaps even a stronger second wave of Coronavirus infections.

The company bolstered its cash position to about $10 billion in cash as of June-end, up from around $3.5 billion at the end of the March quarter. Cash burn is also being contained, with the average daily cash burn declining to just under $35 million a day in June, from an average of about $55 million in Q2. This means that the company can support cash burn at June levels for about 10 months.

This is stronger than United Airlines, which reported cash and short-term investments of about $7.5 billion as of the June quarter – giving it just over 6 months before it runs out of cash at the burn rate of about $40 million per day. However, Delta remains the best-capitalized large airline, with total cash and short-term investments about $16 billion at the end of the June 2020 quarter. Delta can survive close to 19 months even if the cash burn continues at the June rate of about $27 million. ^[1]

Looking Beyond The Coronavirus: Weaker Margin, High Debt Remain A Concern

Overall, American’s reasonably high liquidity position mitigates concerns of survival through the current crisis. Moreover, air travel is an essential service that is likely to rebound fully as the pandemic subsides, helping demand. However, the company’s long-term prospects are mixed, in our view. Operating margins stood at about 6.7% in 2019, compared to about 13.4% for Delta and 8.8% for United Airlines. Moreover, liabilities are also piling up, with long-term debt standing at about $29 billion as of Q2 and the number will only rise further in Q3, as it finalizes a $4.75 billion from the U.S. Department of the Treasury under the CARES Act. Interest expenses have been sizable at about $1 billion in 2019 and the interest burden is only likely to grow further, potentially hurting Net Margins and delaying shareholder returns.

So, American Airlines might give good returns from current levels. But what if you are looking for a more balanced portfolio instead? Here’s a top-quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500, Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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1. Delta Q2 2020 Press Release [↩]