Shares of American Airlines Group (NASDAQ:AAL) are up more than 21% this month despite the company posting a record annual loss of $8.9 billion. The growth in AAL stock is partly due to the Reddit-induced short squeeze and its better-than-expected results.
To be fair, American’s results show progress as it rebounds from the crippling effects of the pandemic. However, despite the improvement, it still boasts the highest cash burn and net debt relative to its peers. Therefore, its recovery should be relatively sluggish compared to other carriers.
In a recent statement, CEO Doug Parker called 2020 “the most challenging year in our company’s history.” He also stated that the timing of the company’s recovery is currently uncertain.
American’s debt troubles had prompted bankruptcy concerns well before the pandemic. It lags behind the sector across all major profitability metrics, and the additional debt burden this year should elongate its struggle even more.
Let’s look at things in a little more depth to understand what’s going on with American.
Better-Than-Expected Earnings
American recently reported its fourth-quarter and full-year 2020 results. Loss per share of $3.86 bested analyst estimates of a $4.11-per-share loss.
Additionally, revenues of $4 billion beat analyst estimates by $120,000 as well. Revenues were down 64% on a year-over-year basis with a 53% reduction year-over-year in total available seat miles. It rounded off the year with a record net loss of $8.9 billion.
A bright spot for American was its domestic business (which was down 66% for the quarter) comparing favorably to its peers. Domestic travel is beneficial in these times when international exposure is lagging due to travel restrictions.
More important, the company has done well to reduce its cash burn rate from $100 million in April last year to $30 million in the fourth quarter. Revenue and cost-reduction initiatives have helped reduce the bleeding and raise $13 billion during the year. The company expects to end the first quarter of 2021 with $15 billion liquidity.
Despite these positives, the first-quarter outlook is not pretty. Capacity should be down 45%, and total revenue will be down roughly 60% to 65%.
However, Parker is confident that 2021 will the year of recovery. Though it remains unclear when passenger demand will return to 2019 levels, the company expects to take advantage of the improved business environment.
Looking Ahead
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It will be interesting to see how the mainline carriers rebound this year as we inch closer to a post-pandemic reality. From the table, we can see that American has the highest debt compared to its peers. Additionally. American has the worst cash to debt ratio, which is also significantly lower than its 10-year median.
Moreover, the company also has the highest cash burn in its peer group.
You would expect Southwest Airlines (NYSE:LUV) to fare significantly better in the coming months due to its reduced international exposure and low-cost structure. Additionally, Delta Airline’s (NYSE:DAL) superior execution should enable it to break-even faster than its peers.
American has done relatively well in reducing its cash burn and debt burden through effective belt-tightening measures. It has also reduced its international capacity and network in the past few quarters. Despite these efforts, though, it still lags behind its competition a fair bit and is, therefore, the least preferable investment among its peers.
Final Word on AAL Stock
AAL stock has been caught up in a short squeeze and is enjoying a good run at the market. For long-term investors, though, there are many negatives associated with the stock at this time.
Particularly, its growing debt burden and cash burn are major points of concern for investors. Therefore, it is likely to recover the slowest out of its peers unless there is a major turnaround in traffic this year.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
