It May Be a While Before American Airlines Stock Takes Off Again
When a company burns through $8.5 billion in cash over a one-year period, the money has to come from somewhere. It can come from either cash on the balance sheet, from issuing more debt or from selling more equity. For American Airlines Group (NASDAQ:AAL), it was mostly debt financed. In 2020, total debt (including operating lease liabilities) increased from $33.4 billion to $41.4 billion. It was also able to raise almost $3 billion from selling shares. With 2021 expected to show a little bit of a recovery, AAL stock remains highly levered as a result of the Covid-19 pandemic.
American Airlines, along with third-party regional carriers, operates almost 6,700 flights per day to 350 destinations in 50 countries. Major hubs include Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. Currently, AAL is the largest airline in the world.
AAL Stock as a Recovery Play
AAL, along with most companies in the travel industry, is expected to be a potential recovery play as the worst of the Covid-19 pandemic winds down and global travel returns to some degree of normalcy.
There are tailwinds for the airline industry currently. In fact, the Transportation Security Administration (TSA) stated 7.1 million people were screened at airports over the Memorial Day weekend. That was one of the busiest travel times since the pandemic began.
Covid-19 Damage
As might have been expected, AAL’s revenues and cash flow got demolished in 2020 as airline travel ground to a halt. Total revenues declined 62%, and the company report a GAAP pre-tax net loss of $11.5 billion. Negative cash flow operations totaled $6.5 billion.
Total debt ballooned as mentioned above, and AAL now has a 5x debt/EBITDA (earnings before interest, taxes, depreciation and amortization) leverage ratio (compared to the industry average of about 2.5x).
In response to the devastating financial effects caused by the pandemic, AAL has employed multiple aggressive cost-saving initiatives to permanently lower costs and increase efficiency of operations. These include taking certain aircraft out of operation and partnering with other airlines.
If anybody knows something about cost-cutting, it’s American Airlines. Recall this fantastic story from former CEO Robert Crandall.
2022: The Recovery Year
Profitability and free cash flow should return in 2022 but not at peak levels, which may not occur until 2023. AAL had one of the highest debt levels in the industry even prior to Covid-19. So balance sheet repair may be a struggle for many years into the future.
But can you imagine what would happen to AAL if a global recession occurs before that balance sheet can be fixed? A highly levered fixed-cost business is not one to own in the next recession.
AAL stock won’t get back in the $50 range until its balance sheet is fixed.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.
