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.
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 oil initiated its descent earlier in the year.
All eyes on liquidity
Without much visibility into what the rest of the year may look like for the airline industry, all attention has now turned to liquidity and how well each company may endure the turbulent months ahead. In this regard, American Airlines provided guidance on two key metrics for 2Q20: daily cash burn of $70 million that will end the quarter at $50 million, and total liquidity of $11 billion, which includes further financial assistance from the federal government.
I assembled the table below to try and make sense of each major airline's ability to weather the storm. The graph depicts the number of days that it would take each of the Big Four to burn through their cash on hand, short-term investments, credit facilities and agreed-upon government grants and loans. It uses the 2Q20 cash burn guidance, and assumes no other initiatives to raise cash or slow down the bleeding. Keep in mind that these days-of-liquidity metrics can change by the week, depending on a number of variables.
Source: DM Martins Research, using data from multiple reports
So far, it seems clear that American will likely have the toughest time dealing with the troubles ahead. At a guided cash burn of $70 million per day, the company would be out of luck in only six months, compared to Southwest's (LUV) less concerning one year-plus.
Of course, the $11 billion quarter-end liquidity guidance suggests that American will fight tooth and nail for each dollar left on the table, and will do what it can to survive for much longer than 180 days. But the company looks like the underdog at this moment, after having already started the race with the worst-looking balance sheet in the airline industry.
Even less interested in AAL
I had already identified AAL as "the most fragile and speculative" play in the sector and took a bearish stance on the stock. Following 1Q20 results, I maintain my views and choose to keep a very safe distant from the stock for as long as the industry remains under intense pressure. Not even the low share price (second most discounted off February peak levels, see below) is enough to lure me into what I would consider a careless bet at this moment.
Source: YCharts
I still think that investing in the airline space is dangerous at least, and loss of significant capital is not off the table. But were I to allocate a small portion of a diversified portfolio to this sector, as I currently do in my All-Equities SRG, I would start from a place of highest possible quality: Southwest first, Alaska Air Group (ALK) second.
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