American Airlines (NASDAQ:AAL) released its Q4 financial statements on Jan. 28 showing expected losses and lower cash burn. AAL stock and its recovery this year is highly dependent on the distribution of vaccines and relaxation of airline travel restrictions imposed in response to the novel coronavirus.
On Feb. 3, American Airlines wrote to its employees that things are more difficult now than expected. For one, the Biden administration has put a new restriction on international travelers requiring them to have a negative Covid-19 test in order to travel to the U.S. That is going to do nothing good for any airline anywhere.
Moreover, the company said that it no longer expects to be able to fly the summer with all of its aircraft. Officials blame a slow distribution of vaccines throughout the U.S. and the world as the cause, along with the new international travel restrictions.
Cash Burn Projections
This has implications for American Airlines’ cash burn situations. For example, the company said that once federal payroll support ends on April 1, it will have too many employees as a result of lower-than-expected demand.
This implies that its cash burn during Q1 might also be worse than previously forecast. Employees were warned in the letter that up to 13,000 more furloughs could occur.
Last quarter, American Airlines had a daily cash burn of $30 million. This was better than the prior quarter when it was $44 million and $58 million in Q2. This can be seen at the bottom of the earnings release where it details the cash burn calculations.
However, last quarter American Airlines did not receive any kind of federal support. As a result, its actual cash flow from operations (CFFO) loss was actually higher than before. The company lost $2.8 billion in Q4, vs. $2.6 billion in Q3 and $908 million in Q2.
Therefore, CFFO losses were higher in Q3, despite having a lower average daily cash burn than in Q2. This is because the definition of cash burn washes out any kind of federal support payments and loans. Cash burn shows the underlying economics of the business.
Looking forward, this implies that although Q1 will show an improvement in CFFO, it might show a deterioration in cash burn. This is despite the company’s guidance on the conference call that its cash burn will be flat relative to Q4 – $30 million per day on average.
But it also implies that prior to the summer, in Q2, without further federal support, its CFFO and cash burn could actually take a turn for the worse.
Unless, of course, by then vaccine distribution has picked up and international airline travel restrictions are not so draconian.
Where This Leaves Investors in AAL Stock
AAL stock initially shot up after the results came out. Part of the reason is that much of the stock available is held short. Yahoo Finance shows that more than 21% of the float was held short as of Feb. 11.
Analysts have come out with bearish reports. Several were featured in an article in Barron’s on Feb. 1. Seaport Global Securities’ Daniel McKenzie withdrew his prior $19 per share target on AAL stock. Barron’s mentioned that the average analyst price target surveyed by FactSet is $12. That is well below the Feb. 10 price of $17.41.
However, I suspect that investors should take a longer view on the company. It may need additional federal support but they can expect that there will be a gradual return to travel habits by many Americans. This will likely start this summer. Although it may not be as strong as perceived earlier, it will still begin to help the airlines like American to recover.
Moreover, once that happens, people will begin to turn much more positive on the stock. Once analysts can start projecting positive CFFO quarters for the company, you could easily see a spike in AAL stock.
Therefore, I suspect that many investors will look for an opportunity to get in on AAL stock on any weakness in its price. This could occur during the next two quarters if the company continues to have difficulties and analysts are negative on its outlook.
On the date of publication, Mark R. Hake does not hold a long or short position in any of the stocks in this article.