American Airlines Is Again the Bearer of Bad News
At the current price of $ 16.49 per share, American Airlines (NASDAQ: AAL) is still relatively close to its 52-week low of $ 8.25. Investors may be tempted to buy AAL shares, as rising flights are expected to increase.
American Airlines is again the bearer of bad news
Source: GagliardiPhotography / Shutterstock.com
But Main Street investors like you and I have to look at the company's past, liquidity, and valuation first. In a troubled industry that has faced overcapacity for some time and as a straggler with a weak balance sheet, AAL stock is one of the last trades investors should consider. Current news only reinforces this thought.
More bad news for American Airlines
On May 27, American Airlines released a management note outlining its continued priorities during the pandemic. Management cited three goals as adequate cash, a reduction in the cash burn rate, and restoration of confidence in air traffic.
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The main focus of the submission is that the company feels that it has sufficient liquidity. To cut costs, staff are reduced by 39,000 through voluntary vacation and early retirement.
Efforts to stop bleeding from the AAL population continue
The company is trying to streamline operations to reduce daily cash usage. AAL will give priority to fleet optimization and the restructured organizational teams. The company plans to fly 100 fewer aircraft by next summer, and will primarily remove wide-bodied aircraft and withdraw them from service. The company's current fleet consists of around 80/20 percent narrow-body and wide-body aircraft. And American currently has a total fleet of 871 aircraft.
AAL management prioritizes restructuring to prioritize future leaders and talents. The management and support staff should be about 30% leaner in the future to take account of the reduction in operations. American emphasizes that this decision is voluntary and that involuntary separations will be announced in July.
Needless to say, the company will have a struggle to persuade workers to voluntarily quit this job environment. Those who will "involuntarily separate" Americans in July will have a union on their behalf. American Airlines stock will respond. I don't expect this to be a boon to the stock price.
Basic cash problems
Management also announced that the company will have $ 11 billion in liquidity (page 44) at the end of the second quarter. American Airlines forecasts an average cash burn of $ 70 million in the second quarter. In addition, the average daily cash burn is expected to drop to $ 50 million in June. With a few quick calculations, we can extrapolate that AAL will consume $ 6.3 billion in the second quarter (90 days in a quarter x $ 70 million daily average cash usage).
Such sustained losses have certainly harmed the company in the short term. However, American Airlines also had to postpone its debt due dates to refinance new liquidity. Even if people fly again, American management will struggle to find creative ways to pay off these newly issued debts. Americans face years of billing.
Realities with a view to American stocks
Two current stakeholders are the most accountable: AAL shareholders and the 39,000 employees who will be unemployed in July.
We should certainly consider the people who will lose their livelihood. They are real people who are too often glossed over in economic discussions. At the same time, it is important to consider shareholders who may have lost significant parts of their retirement in the wake of this disaster. They are just as real. And none of this is a good sign for the AAL share.
American Airlines stock appears to be prepared for lean years. The company came across this pandemic with a weak balance sheet compared to its competitors. American Airlines' cash burn and the issuance of new debt only made the situation worse. Despite management's rosy assurances that his plan should bear fruit in July, it looks grim.
An obvious truth is that the operating income is intended to repay this current liquidity issue. Investors in AAL shares will not be given priority in this environment. It makes little sense to expect a serious price increase or above-average sales payments from the share.
The only compelling argument for buying American Airline shares is the vague notion that it is so constrained that a recovery will have to take place at some point. In my eyes it would take a long time. Investors looking to buy low-cost airline stocks should consider Southwest Airlines (NYSE: LUV) and Delta Air Lines (NYSE: DAL), which are better managed.
At the time of this writing, Alex Sirois had no position in any of the stocks listed above.
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