American Airlines had a worrisome earnings call this week with investors. It seems the carrier needs a great Christmas or could go bust.
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Live and Let’s Fly
Running Out of Options
In times of hardship, businesses and family alike have to consider what assets they have to leverage. That may mean downsizing a home, trading in or selling a car, even cashing in retirement assets. The problem with American is that they don’t have much left to sell. During this week’s Q3 2020 Earnings call, American management tried to put a rosy spin on a dismal quarter.
Gary Leff did a great job of pointing out some of the key issues with regard to this:
- American will sell $1bn of stock holdings (79.365MM shares at Friday’s close, 76.045MM shares at Friday’s open)
- American is still burning too much cash. The airline is burning less cash ($44MM/day vs. $58MM/day last quarter) but that’s not a recipe for success.
- Co-brand (read: sale of miles) revenue is down. For almost two years, American Airlines lost money flying passengers and cargo but was profitable solely because of this revenue.
The carrier also retired the entire A330 fleet (both 200s, and 300s now) which follows 757s, 767s, E-190s, and some 737s. Their new simplified fleet has just four aircraft types – 737, 777, A320, and 787s, the most fuel-efficient and cheapest to operate in the fleet (though the E-190s were pretty efficient.) American may find buyers of retired equipment (piecemeal or whole) over time but they likely can’t get much more fuel-efficient until new equipment arrives.
Another bailout could come… or could not. Regardless of the outcome of the election, I find it doubtful for either side to be conciliatory and try to get deals done. I also don’t know that airlines should get a second bailout anyway.
Not a Fan of American Airlines Management
I’ve been critical of American Airlines management and despite flashes of change, I have significant doubts about their team’s ability to overcome this challenge. The carrier was one of the largest in the world (depending on the category.) It’s fair to assume their share of the coronavirus crisis would have been one of the hardest to overcome. American is not doing as well as their peers and unfortunately, the carrier started from a far worse position with relation to debt.
Virtually every carrier besides American and United blocked the middle seat. I called that a marketing ploy because airlines weren’t selling enough seats to fill them anyway – they still aren’t. But that marketing ploy might have worked for the other guys. Passengers appear to simply book those carriers over American, the blocked middle seat has been a reason why some of my clients selected Delta, and Southwest over American despite holding status.
Crises like these are when airlines really need their loyalists.
Past Sins Unforgiven
It’s no secret that American Airlines management and the unions didn’t get along. For years, mechanics were without a new contract contributing to the airline’s summer of hell. Flight attendants were not happy with management either. One of the reasons American is struggling more than other carriers is due to labor groups being less cooperative with both concessions and voluntary separation agreements. Those groups aren’t going to give management an inch and they shouldn’t. American wanted to play hardball, and they don’t deserve grace when they haven’t otherwise shown it. For perspective, Delta didn’t have to involuntarily terminate any employees as they received sufficient adjustments and voluntary separation where American did not.
Stock buybacks were a bad decision twice. The carrier used cash to buy its own stock at pre-COVID levels. Those assets are currently valued somewhere between 60-70% less on the current open market. The carrier was criticized for using cash in good times to buy back stock instead of paying down debt. It angered many at the time of acquisition, and now when it’s time to sell those assets, they are taking a loss on every single share.
Will Santa Slide Down Chimney of American’s Dallas HQ?
Just how much is needed to overcome costs? The carrier states that they have $15 bn in liquidity (but filed bankruptcy last time with $4bn in the bank.) If we reduce that liquidity down to $11bn based on this and calculate the current burn rate ($44MM/day) the carrier has half a year of cash before they are down to the last dollar. That, of course, doesn’t take into account any debt payments that may live outside of that daily burn, any special circumstances, costs, or events.
Christmas and New Year’s usually high traffic periods for the carrier are unknowns. Will people get back on planes and visit their families? If so, will they choose American? That occurs in the first third of their remaining cash burn. However, even for businesses starting to travel again, January and February are almost always dead. I often conducted mileage runs during this period because of the fares and easy upgrades. If the first third of their cash burn period isn’t wildly successful, the following third is almost certain to be anemic at a level the airline hasn’t yet seen in this environment.
American Airlines really needs some help from Santa Claus this year because even the status quo of third-quarter carrying forward could spell disaster for a carrier that desperately needs a resurgence.
American Airlines has few levers left to pull. They won’t get any help from labor, who management fought tooth and nail prior to the crisis. They unceremoniously sacked more than 10,000 at the first moment the carrier could do so legally. Based on the carrier’s current liquidity, cash burn rate, upcoming schedule opportunities and challenges, it could be Christmas or bust for American.
What do you think? Is American Airlines’ situation dire? Will it pick back up and turn around? Is Management’s progress from $58MM/day to $44MM/day enough of a trend to stave off disaster?