Think of American Airlines (NYSE:AAL) and AAL stock as a leaky balloon, and cash as the air in that balloon.
The company continues to burn cash, although at a decreasing rate. The leak caused it to burn through cash it was given under the CARES Act. American is now going through its loans.
Emergency borrowing and CARES Act funding raised American’s cash position to $10.3 billion by the end of June. At the burn rate being reported then, however, that cash would run out by next March.
The failure to contain the virus over the summer means emergency surgery is required. The airline is now throwing people overboard. Some 19,000 jobs will be gone by October 1 and service will be suspended to 15 cities.
Employment at American will be 30% lower in October than it was in March.
Will It Be Enough for AAL Stock?
There are now two questions for investors. Will these actions be enough to stabilize the company, and what will be left when the pandemic eases?
AAL stock was due to open Aug. 27 at $13/share. That’s a market cap of $6.5 billion for a company that had revenue of over $47 billion in 2019. But the stock is no bargain. Revenue for the June quarter came in at $1.62 billion. That’s down by 87% from the previous June’s $11.9 billion.
American next reports results Oct. 22. The average revenue estimate for the current quarter is $2.8 billion, with $4.7 billion of revenue expected for the December quarter. Analysts believe the airline is pulling out of its dive. But can it, while the pandemic still rages, with a second wave expected in the fall?
American is doing creative things to bring passengers back. It’s spraying down the inside of planes before each trip. It’s quietly eliminating change fees for some business travelers, hoping that will spur reservations. It’s extending travel waivers and serving more food in its airport lounges.
The problem is that none of these moves address the real danger of flying. If one passenger comes on who is shedding virus but has no symptoms, nearly everyone on the plane may become infected on the subsequent flight. The famous Purdue illustration of a single passenger infecting everyone around them resonates.
Who is Buying?
Despite the problems, analysts are still recommending American Airlines stock to investors.
Raymond James analyst Savanthi Syth gave the stock a “market perform” rating late last month, six weeks after giving it an “underperform” rating. The stock’s fall from $20/share to $12/share changed minds.
There’s also the hope of a second bail-out. The industry wants another $25 billion. At least 16 Republican Senators want to give it to them. New aid would cover remaining jobs through the end of next March. But no aid will come unless both parties agree to a complete package. The two sides remain far apart.
The Bottom Line
What looked in January like a solid investment at $29 per share now looks like a speculation at $13.
The administration has tried to keep American flying with cash. But its failure to control the virus means that cash continues to burn. Even if American survives, it will be at least 30% smaller than it was. Its ability to generate revenue will be 30% lower, its potential earnings will be 30% lower.
That may be a bet worth making, but there are surer things in the current market. There are companies that are making money you can invest in with confidence. Cash is also an asset.
With all those caveats, I’m packing my bags as soon as it’s safe. You’re free to speculate on when that is.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.