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American Airlines Is A Sell As Its Cash Flow Will Deteriorate After Q2

Jun. 03, 2020 5:33 PM ETAmerican Airlines Group Inc. (AAL)67 Comments
Robbert Manders profile picture
Robbert Manders


  • Demand for tickets will remain low for at least the remainder of 2020.
  • The lack of sales will hurt both AAL's working capital and EBITDA.
  • Cash flow will take a steep dive in Q3 and don't pick-up in Q4.
  • The stock is not worth anything close to $12 unless a strong and swift recovery is an undeniable fact, which it isn't.

Airlines have been a hotly debated topic lately. Some investors who hope for a full recovery think that the sector is worth buying, others believe that it is doomed. A crucial piece of support came from the US Federal government and this, together with hopes of a quick pick-up of air travel is keeping airline stocks afloat. On the other side we have industry reports and insiders that say that it can take a long time for air travel to pick up and even the CEO of Boeing (BA) adding fuel to the fire.

The industry is clearly in dire shape but the US Treasury reached out its saving hand with loans and grants. American Airlines Group (NASDAQ:AAL) is the biggest recipient of the payroll support program for airlines. But, as the NYT pointed out, it is going to be tough after September and few in the industry expect the public to ‘tolerate another bailout’. This calls attention to the air traffic liability of AAL and its ability to generate cash flow for the rest of the year. After all, its bonds still trade at steep discounts to par, implying a huge bankruptcy risk.

My cash flow forecasts in this article show how difficult the road ahead is for AAL and why a stock price of $5 makes more sense than the roughly $12 at which it currently trades.

Airline ticket demand and ATL

Airline traffic may catch up, but even if that happens quite soon, I don’t expect people to pay in advance for their tickets like they used to. This is a problem to AAL as ATL or Air Traffic Liability on its balance sheet primarily shows sold but not yet used tickets for air travel.

There are several factors at play: first of all, there is less traffic/demand so

This article was written by

Robbert Manders profile picture
Currently work at a HF so won't be actively contributing in the near future. Besides being a fundamental value investor, I have a master's degree in Finance, have been investing myself for over 10 years, and have equity analyst experience at a top Dutch buy-side institution. I live in the Netherlands and will share my European perspective on stocks worldwide.

Analyst’s Disclosure: I am/we are short AER. 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 (67)

Robbert Manders profile picture
The industry might be profitable in 2022, but is set to still lose billions in 2021 www.iata.org/...
Robbert Manders profile picture
An interesting 8-K was published this morning.
They expect Q2 revenue to be down 90%.
Tim Dunn profile picture
which is no different from DAL and yet AAL is the one that is throwing capacity back into the market
Robbert Manders profile picture
AAL is in the position where they have to take the gamble.
Small bit, AAL 70% domestic, and they have the 2 out of 3 top hubs.
Lance Brofman profile picture
ALL junk bonds yield 27%

Issue: AAL4835666
Coupon Rate: 5.000
Maturity Date: 06/01/2022
Trade 500000 price=68.010 yield 26.983%

New Zealand and Iceland reported no new cases of Covid-19, thus travel between those countries will not be restricted. As other countries also eradicate Covid-19 travel between them will be allowed with out 14-day mandatory quarantines upon arrival. America will be the last developed country to have no cases. When the government stops paying their payroll expenses, AAL's $40 million a day cash burn will be a fond memory.

…As of April 22, 2020, the USA with about 5% of the world population, is experiencing about 33% of the new daily COVID-19 deaths. Countries such as South Korea, Germany and New Zealand seem to have been much better prepared for COVID-19. Other countries may be able to resume full production sooner than the USA. There even might be a time where travel within and/or to and from the USA is restricted far more, than in the rest of the developed world.

The first cases of COVID-19 appeared about simultaneously in the United States and South Korea. As of April 21, 2020, there were a total of 237 COVID-19 deaths in South Korea as compared to 43,200 in the USA. On a per capita basis, South Korea with a population of 51,269,185 had 0.00000462 COVID-19 deaths. For the United States with a population of 331,002,651 the per capita deaths are 0.001305. Thus, the per capita COVID-19 death rate in the United States is 282 times that of South Korea.."...
sigarms profile picture
I have flown on 18 flights since March 23rd....planes are perfectly fine to fly on and air quality is excellent due to the modern pressurization systems and air filtration. Follow you basic hygiene and they is nothing to worry about. Fact. I am in the business and know.
likewise! I have been on 2 flights and observing the emptiness of both the airplanes and airports, I reckon those places are safer than being in Target.
rexarus profile picture
I can't see why anyone would short AAL - pretty darn risky. The bookings are rising rapidly. For example, the Miami - New York pairing alone is up from 2 flights a day 2 weeks ago to 10 a day, and they are filling fast. The Floyd incident has one big silver lining, and that's the Covid-19 is dead. If it's okay to have mass groups protesting the Floyd case, then it's just fine to go fly too. I can't even imagine that Bears of Wall Street guy, pumping his position here on 5/22, who was shorting this stock below $10. Whew wee me gosh!!! Da pains!!!
Surely shorting in this market is risky - as many stocks are not trading on their fundamental value at all. They are trading more like bitcoin - just a market between buyers/sellers. At today's price AAL enterprise value is about 20% below its peak. Stock price is much lower, but they are also losing money each day and taking debt. EV is more appropriate measure. Question is should AAL trade higher than pre-covid? Below pre-covid? Two times pre-covid? Half of pre-covid? Of course, market is not at all caring about these. Simply trading like bitcoin, fully removed from underlying company. Shorting is very risky. But I won't buy here.
@tradetech19 You want risk? I am literally in the street if AAL trades below $9 at November options expiration or above $37 at June options expiration. Quite literally. That's risk. It's unlikely to double in next 13 days but 50% loss in 6 months is almost certain.
Comments3409 | Following
I lost huge trying to ride daily calls on AAL today. Almost completely out of money. Stepping away until November 20 market close- I sold the $9 puts for November but my effective cost at November 20 close is 9, not 7- because of the losses trading today- really sick! Well, we'll see- probably AAL loses 80% by November now. @kimbillro
Bot did this author blow his article and his timing could not be worse.


This will probably be a 3 gap up event with day 2 tomorrow. 20+ is in the cards with a distinct possibility of touching the 200 dma at 22.50 by Monday.
Worst timing ever. You may be right but also may not be. I think part of the wall street vs main street difference right now is that companies are trimming the fat. There is a chance they could reduce their expenses as much as their revenues have been reduced. Thus s possible bull case
Airlines can't make Money at 50% load factors. We may never see planes often full ever again as people change everyday habits.
DimaP123 profile picture
oh yes, they can. As long as flight is cash positive (cheap fuel, higher ticket prices, whatever is it else), you make money. It is all about volume. You can't live on $1 profit from your 10 shares position, but scaling it to 10,000 shares you perfectly can.
This ain't done yet. Will gap up tomorrow again.
This didn’t age well...
Robbert Manders profile picture
The timing is great. The stock was up before you could use this analysis to trade which puts you in a good position as an investor. Today's performance only adds to het downside of my thesis and will improve the relative performance of my pick over the next year or so.

Nothing about my thesis changed and in fact the flight schedule is moving closer to my Q3 projection of 50% of last year's capacity. That's still a very long way from profitability. I feel much more comfortable with my very bearish call at a price of $17 than I do at $15 or $12. I may even initiate a short position myself soon.
Robbert Manders profile picture
Besides, it's not even been a day. We're not day traders here!
Stone Fox Capital profile picture
@English Man
Very true, airline stocks are headed to previous highs as well. My upcoming $DAL article will address this possibility!
You came to dinner too late. Look at today's stock price and projection of AAL and the air industry as a whole.
DimaP123 profile picture
I don't know how about you guys, but I closed my AAL position for a very nice profit.
Robbert Manders profile picture
Well done!
With all due respect, this is a bad take. AAL is very cheap if a recovery kicks in. So are the rest of the airlines.
Fishtown Capital profile picture
@allenhe "Cheap" on what basis?
sigarms profile picture
As an investment what do you think? You are scared with your short position
DimaP123 profile picture
just buy JETS if you believe that airlines will recover (of cause they will, less risk, less reward on ETF) or individual stocks (more risk, more reward).
Another week another negative article about AAL, how about you guys find someone else to beat up on for awhile.
They are looking at debt and cash flow... Neither looks good AT ALL. You are betting on planes being filled... They still have to pay an insane amount of debt.. THey are barely at 50%... Sure gamble now but the market doesnt let you know until its too late to take home your gamble winnings. THis is a long game not a gamblers game.
DimaP123 profile picture
I think they are positioned not as bad as everyone are trying to portrait them. Yes, book does not look as good as others, yes they are the biggest airline, but they have ways to survive. They have a lot of pilots and personnel that will be eligible to retire by the end of this year and even more by the end of next year. That will noticeably reduce their burn rate. Also, in the plan is to squeeze out weaker/smaller airlines and get more spots in their most profitable hubs. At the end they can get cargo shipments going. For fast shipment, it is very important to have a wide network. Let's say Amazon amount of destinations they fly is not nearly close to American's network. It is all doable and will help to regain strength. I'm long AAL at the moment, but I trade it. This stock and the situation offers plenty of opportunities for trading.
Michael777 profile picture
Honestly you lost me after the headline. Good luck with your short position.....
Keeper7 profile picture
I’ll give you .25 cents for each plane.
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