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American Airlines: Shortest Runway Ahead


  • American Airlines' 1Q20 results were pitiful, but the narrative has now turned from operational performance to liquidity and cost containment.
  • I estimate that the Fort Worth-based company has the shortest runway ahead before it runs out of liquidity.
  • To invest in the airlines sector today, I would start from a place of highest possible quality: Southwest first, Alaska Air second.
  • Looking for a helping hand in the market? Members of Storm-Resistant Growth get exclusive ideas and guidance to navigate any climate. Get started today »

On the last day of a very bullish month of April for the broad stock market, American Airlines (NASDAQ:AAL) delivered an ugly 1Q20 earnings report. While no one really expected the March quarter to be anything but disastrous for the whole airline space, the Fort Worth, Texas-based company posted headline numbers that were even worse than consensus estimates.

To be fair, past results should mean little for the investment thesis on American Airlines or any of its peers. As air carriers continue to endure a painful period of hibernation in the second quarter, the narrative has now turned from operational performance to liquidity and cost containment.

American Airlines posted headline numbers that were even worse than consensus estimates Credit: The Business Journals

A brief look at results

For what it's worth, American's passenger revenues dropped 20.5% YOY on traffic decrease of nearly 18% that was a full percentage point worse than Delta's (DAL) comparable number. American's load factor dropped about as much as its Atlanta-based competitor's, suggesting that the company may have managed to do a decent-enough job at adjusting capacity to sharply reduced demand.

Perhaps the two items that contributed the most to revenues having tripped over an already low bar in the first quarter were revenues per seat and cargo. On the former, PRASM (a measure of per-unit passenger revenues) sank almost 15%, quite a bit more than Delta's 13.3% in what may be indicative of lower-than-average pricing power. Cargo saw an even worse decline of 30% that made Delta's already concerning 21% dip look modest - but the segment only accounted for 8% of total revenues in 1Q20.

Not much of a shocker, CASM-ex (a measure of per-unit cost that excludes fuel and other items) spiked by almost 10% due to sudden loss of scale. The bottom line could have looked much worse, if not for per-gallon fuel costs that pulled back 10% as crude

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This article was written by

DM Martins Research profile picture

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I am/we are long LUV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (47)

OverTheHorizon profile picture
It seems the real wild cards are 30 million unemployed, consumers fear level (ie leisure and hospitality) and significantly less business travel, which goes w unemployment but may be a more significant long term factor. Of course the stock market is going to have its own interpretations so airlines could start rebounding here— or not.
Navid, PhD profile picture
I am long DAL>UAL hoping they survive.
The remaining three cash alternatives for AAL beyond the current $11 billion cash pile are either dilutive to current shareholders or destructive of future earnings. The AAdvantage program is the largest untapped source of cash but the haircut AAL would take to sell it or even a portion of it would be substantial for the simple reason that demand for flying is likely to be down perhaps as much as 50% from the January 2020 passenger numbers, for as long as two years. Potential buyers will demand a large haircut and they will get it. The cash for unencumbered assets too is large but taking large loans against them or selling and leasing back aircraft will seriously increase the debt load of the company further. The remaining piece of available government assistance ($5 to $6 billion) would come with a demand for stock warrants in return, diluting current shareholders.

Buffett is 1) an informed investor & 2) utilizes a proven method for generating significant alpha. If he has sold completely, as the largest non-institutional holder in the airlines industry, that should be telling you that the earnings capacity of these firms is seriously impaired for the foreseeable future. The best play now is out of the money put options on AAL. The ship be sinking.
Warren sold his entire position in airlines stocks!!!!
Yep he sold all four including Southwest by far the healthiest one! Airline bulls will be getting gored next week
Tim Dunn profile picture
And I assure you that Warren will miss out on the return of at least one airline; he could have chosen one airline to focus on but instead tried to play an entire industry when it is clear that there are vast differences in how well AAL DAL LUV and UAL are run.
jz10 profile picture
@Tim Dunn It is also possible that Warren will miss out on the bankruptcies of all 4 airlines. Nothing prevents from all 4 airlines from declaring bankruptcy. It really depends on how long this downturn in air travel lasts.

Just look at the offshore drilling industry. Even the strongest companies in the sector cannot escape bankruptcy. Some companies are soon to be on their 2nd bankruptcy in 4 years.

AAL in particular would be a formidable competitor once it goes bankrupt and wipes out a bunch of debt. It has the newest aircraft fleet so it will have the lowest fuel costs. It would be in a good position to underprice its competitors and grab market share.

The airlines that do not go bankrupt will have trouble competing with new AAL's cost structure.
I am short American since $27, but in total disagreement with the premise of this article. The article presumes no access to cash and a continual burn at the current rate.
It is easy to do financial statement analysis to get to the answer that D.M. Martins Research came up with, but the answer is wrong. Here's why.
In all 3 transcripts from the big 3 legacies, American, Delta and United, they revealed what they had pledged as assets and all three disclosed that their current position in pledging to not pledging their frequent flyer plans. Frequent flyer plans dont show up as valuable on accounting books as they are as separate entities. They have few assets associated with them, but their value is in the tens of billions. Stifel estimated the value of the AAdvantage program at $37 billion.

American's Isom said... "Based on these appraisals, we believe the value of our unencumbered assets is in excess of $10 billion, excluding the loyalty program, and we expect to pledge a portion of our assets for the secured loan we have applied for under the CARES Act."

At United, Gerald Laderman said..."there are different ways to look at collateral and the way we look at it may not be apples-to-apples with the way others have looked at it. But having said that, and excluding mileage plus, which we all know is a valuable asset, we have at least $10 billion in other available collateral value that we can use to continue to raise secured debt.

Delta's Paul Jacobson...(to a question about pledged assets) "we have as I mentioned in exhaustive list of potential opportunities that range across the board including secured debt, equity convertible, the government loan program SkyMiles lots of different things on it."

American and United have not pledged the value in their frequent flyer programs, while Delta has.
If they are having to sell airline miles and other encumbered assets to raise cash just to stay afloat, what value is buying common at these levels with potentially years before 2019 revenue levels not to mention the added debt.
ImRanger profile picture
Very nice
Not miles, the whole loyalty program brings in tens of billions and can be used to back loans.
I read a few weeks back that DAL had a cash burn 100 million a day. Did they come out and say they lowered that?
I think it is down to $50 mil/day.
DM Martins Research profile picture
Yes. Delta is guiding 2Q cash burn of $50 million, while American is guiding $70 million with an exit run rate of $50 million. United's outlook is a bit lower than Delta's, and Southwest's is substantially lower than all of them.

Hope this helps.
I agree that SWA is the best out of the 4. Hard to see who is ahead out of the other 3. UAL just came out with a 5,007 pilot displacement bid. Meaning they will furlough Oct 1 from what I see. Biggest International exposure. DAL is exposed to LATAM and ownership in other Airlines that could hurt them financially. From what I have been told there will be further bailouts for the industry. Anywhere from 2-4. I wouldn’t touch any of them for a while.
I was foolish to start a large position last Friday
Lured by juicy options premiums ...
Will see if I can survive it
Shortest runway? How about smallest engines? Yes for sure their situation is very perilous indeed and the weakest of the four.
I suggest just staying out till mid June before investing in airline space ..aal drowning through cash but I predict a quick recovery after the storm
Yes it seems a good idea to wait to get better prices. The overall market might crater again.
autofixer profile picture
So you like LUV and hate AAL? Typical cultish behavior.
DM Martins Research profile picture
Hi there! I have been bullish LUV and bearish AAL since the publishing of my first sector-wide study, in Sep 2018.

Bull LUV: seekingalpha.com/...
Bear AAL: seekingalpha.com/...

A simple long-short play here would have been up a nice 24% per year (44% cumulative) with max drawdown of only 10%: www.portfoliovisualizer.com/... Let's see if the trend continues.

Happy investing!
ImRanger profile picture
They'll pull through.
DM Martins Research profile picture
I think they may, but with plenty of government help. If anyone in the airline industry fails at all, I think AAL is candidate #1. Thanks for the note!
They will survive but they will be saddled with massive debt. They already have massive debt. Add in all they monies will need now to survive. I think they should suspend the dividend and any stock buy backs till the debt is under control. Also fire the worst CEO in the business Parker who put them on this suicide path and don’t tell me he couldn’t foresee this. He ran the company completely irresponsible from a financial perspective
DM Martins Research profile picture
@FLMike Silver lining: if American is heavily leveraged, which it has been and will continue to be, the stock should also rebound the most if the company survives.

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