I’ve changed my mind about American Airlines (NASDAQ:AAL). I previously wrote that AAL stock would not survive its crushing debt. But several recent events and actions by the company prompted some second thoughts. I also changed my estimates of the company’s cash burn this year and EBITDA next year.
And there is one more practical issue. The stock has not fallen as I had forecast, making me believe the worst is already discounted into the present price, which opened the month of June at $10.50 per share. That was 8.9% higher than when I last wrote about AAL stock on May 19, when it was $9.64 per share.
Yet, the release of an internal email on pending staff cuts and management’s recent investor update helped changed my mind about American Airlines. I realized that the company is likely to survive … although just barely.
Chapter 11 not an Option
Why did I change my mind? First, there was the May 27 Bernstein 2020 Strategic Decisions Conference. At the conference, CEO Doug Parker, made it clear that bankruptcy will not be an option for them.
Responding to an analyst’s question, he said that he does not see bankruptcy as a “financial tool.” More of a “failure,” Parker said. But what impressed me most, was what he said next: “I think our job is to preserve shareholder value. And that is what we are going to do.”
He went on to point out that the present crisis is a demand crisis, not an overcapacity crisis. In the past, too many airlines with too much capacity were the reasons why some airline bankruptcies, even liquidations, had to occur. This time, it is a matter of the demand for airline travel to slowly return over time. The issue, then, is for airlines to manage their liquidity through that period.
The CEO and his CFO discuss at length the carrier’s ability to reduce the cash burn. They implied that the company could get it down to about $40 million per day, with no revenue by the end of the third quarter. With a pickup in demand, the airline’s cash burn would slow to $20 million per day by the end of the third quarter.
That works out to just $1.82 billion in burn by Q4. I previously estimated there would be $6 billion in cash burn during Q3 and Q4. I don’t see that now — probably just $3.5 billion in Q3 and $1.8 billion in Q4. Along with $6.7 billion in Q2, the total burn through from March 31 forward will be just $12 billion.
Liquidity Should Cover the Burn
American Airlines said in its Q1 earnings release on April 30 that it expects to end Q2 with $11 billion in liquidity. That would be more than enough to cover the estimated $5.3 billion in cash burn during Q3 and Q4. However, I believe this includes an estimated injection of $4.75 billion from a loan under the CARES Act.
This assumes that the cash burn will drop to $50 million per day by the end of the second quarter, and $20 million per day by the end of the third quarter.
Based on this model for the company, it will turn cash flow positive sometime during the first quarter or second quarter of 2021. At that point, the issue of liquidity will be moot.
Airport Checkpoint Traffic Improvements
To be sure, all this is also based on an uptick in air travel. As I pointed out in my last article, TSA numbers for airport traffic show a significant increase in travelers queuing up to take off their shoes and belts. You can see this in the TSA daily checkpoint traffic numbers.
For example, in the past month, travel traffic has now increased. You can see this in the table I have prepared at the right.
It shows that in the last month, the year-over-year declines in checkpoint traffic have improved.
A month ago, the drop in TSA airport traffic was 94.6% YoY for the week ending April 30. A month later, the drop had improved by almost 7 percentage points to 87.7%.
If this trend continues, the quarterly pickup in traffic should be significant, especially over the summer months.
What to do With AAL Stock?
Buying AAL stock will be a speculative play for most investors. Nevertheless, I now believe that the company will survive and that management seems to have enough liquidity to last through the end of the year.
However, I really do not yet know how to model the company’s true value. Shareholders’ equity and book value per share are still negative. Moreover, it is too soon to picture what real value will be by next year because there is no way to estimate real demand for travel.
In addition, if the company has to take on further debt, that will degrade its estimated true value. So, for right now, I suspect that American Airlines stock is going to survive, but it may be just barely.
One thing is for sure, though. If the travel traffic numbers continue to pick up, and if American can lower its cash burn, AAL stock will jump. It will move up well before there are any definite numbers that can justify its rise.
The stock will tend to discount better numbers on any sign of continued improvement. I suspect that is probably reason enough for speculative investors to ump into AAL stock.