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American Airlines Will Never Escape Its Debt Burden

May 04, 2020 10:05 AM ETAmerican Airlines Group Inc. (AAL)44 Comments
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DT Analysis


  • Recently Warren Buffett sold his entire stake in American Airlines, along with his investments in their peers.
  • This was partly due to the additional borrowings they are taking from the government, which takes away from the upside of any recovery.
  • Whilst these borrowings have thus far allowed them to avoid bankruptcy, they still face an insurmountable task reducing their swelling debt burden even in the most optimistic future.
  • Based upon my analysis it appears as though that even by 2030 their leverage will likely still not be safe, even with very optimistic future assumptions.
  • Given this I will continue maintaining my neutral rating, as they are not attractive for long-term fundamental investors but may still be desirable for short-term traders.


The biggest recent news for American Airlines (NASDAQ:AAL) is that Warren Buffett has sold his entire stake in the company, partly due to their additional borrowings from the government taking away from the upside. Whilst this government support has been a relief for shareholders who otherwise faced seeing their company enter bankruptcy, in the long term they still face the seemingly insurmountable task of reducing their swelling debt burden even in the most optimistic future.


I previously warned late 2019 that they were vulnerable and inadequately prepared for any downturn following years of pursuing debt funded share buybacks on the back of negative free cash flow. This left their leverage heading into this downturn at high levels that are only considered manageable for companies with strong and economically resilient earnings. Since this is all in the past now, it has little bearing over this analysis and if interested in more details, please refer to my previous article or my subsequent follow-up analysis.

American Airlines cash flowsAmerican Airlines notes

Image Source: Author.


The assumptions underpinning this analysis were purposely selected to be the most optimistic possible, not because I believe that these will actually eventuate, but rather to illustrate the severity of their situation.

Assumption One

The first assumption relates to when a recovery eventuates for their industry as well as the extent to which it recovers. Although no one knows exactly when air travel will return to its levels before the coronavirus struck, virtually everyone agrees that a full recovery will take several years. To provide the most optimistic scenario possible, it was assumed that 2021 sees a partial recovery that keeps them cash flow neutral. After which conditions completely recover by the start of 2022 with operating cash flow then reaching the average of 2017-2019 at approximately $4b per annum.

Assumption Two

This article was written by

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I am no longer active, as I am taking a hiatus from finance to pursue business ventures in other sectors.  I hope that my analysis was helpful to investors across the years, thank you.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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