So far, 2020 has been an awful year for American Airlines (NASDAQ:AAL). The COVID-19 pandemic caused demand to plunge to nearly zero beginning in March. As a result, American -- which had hoped to start paying down its massive debt load this year -- has instead been bleeding cash rapidly. Meanwhile, American Airlines' stock price has plunged, bottoming out at $8.25 in mid-May.
Since then, American Airlines' share price has been recovering gradually, reaching $11.85 by the end of trading on Wednesday. The stock proceeded to go on a tear on Thursday, surging as much as 53% before pulling back to end the day up "only" 41%.
So what caused American Airlines stock to skyrocket yesterday? Did the company receive a big windfall? Raise its earnings guidance? Announce a promising turnaround plan?
To answer those three questions: no, no, and no. The only news was that American Airlines is significantly increasing its capacity in July compared to the past couple of months, due to improving booking trends. The impact of this revelation was amplified by a massive short squeeze. Considering American's extremely weak balance sheet, this news certainly didn't justify such a big jump in American Airlines' stock price.
What the airline said
During May, American Airlines limited its domestic capacity to just 20% of 2019 levels, in response to the sharp decline in air-travel demand. It implemented even sharper cuts to its international routes. That enabled a significant increase in American's load factor (the percentage of seats filled with paying customers) compared to the prior month.
In April -- when American was operating more flights -- load factor averaged just 15%. Load factor improved to 41% for the first 23 days of May and 55% from May 24 to May 29. In the last week of May, American Airlines carried an average of 110,330 passengers per day, up from 32,154 in April.
This wasn't entirely news, though. At an industry conference last week, American Airlines CEO Doug Parker told investors that the carrier's load factor had reached 56% over Memorial Day weekend. Furthermore, passenger throughput at TSA checkpoints has more than tripled since mid-April, according to statistics the TSA has been providing daily.
The one piece of real news was that American Airlines plans to fly a little more than 55% of its July 2019 domestic schedule next month, reflecting slow but steady sequential improvements in demand. International capacity will remain down more than 80% year over year, leaving systemwide capacity at 40% of July 2019 levels.
Traffic is returning; profits aren't
American Airlines' July schedule update suggests that the carrier is seeing improved booking trends for the peak summer travel season. Nevertheless, it's clear that demand remains far below 2019 levels.
Throughput at TSA checkpoints has been down more than 85% year over year in recent weeks. That might conceivably improve to down 70% or so in July, but that's still quite awful. It's doubtful that any U.S. airlines can make money with that level of volume -- certainly not American Airlines, which has below-average margins in the best of times.
Furthermore, as every Econ 101 student learns, there's a difference between demand and quantity demanded. Sequential improvements in passenger traffic are less impressive if they're being stimulated by unusually low fares.
While it's too soon to know for sure, there's reason to believe that cheap fares are contributing to the rebound in air travel. At the industry conference last week, American Airlines' management reiterated its late-April forecast that daily cash burn would recede to $50 million by June but average around $70 million for the second quarter as whole. That's the highest level of projected cash burn for any U.S. airline.
If fares were anywhere near 2019 levels, rising bookings and traffic would have allowed American Airlines to improve its cash-flow forecast. Instead, the airline remains on pace to burn through a stunning $6 billion or more just in the second quarter.
Avoid American Airlines stock
Cost reductions and the gradual return of demand will allow American Airlines to reduce its cash burn in the second half of 2020. Nevertheless, the airline is almost certain to burn billions more before year-end.
This will boost American Airlines' combined debt, lease, and pension liabilities from around $40 billion at the end of last quarter to roughly $50 billion by the end of 2020. That alone is reason enough for investors to steer clear of American Airlines stock. Digging out from this debt pile will be nearly impossible.
Furthermore, it could take two years or more for American Airlines to return to profitability. Most analysts expect business travel and long-haul international travel to recover very slowly. Meanwhile, competition to serve domestic leisure travelers could be brutal, as low-fare airlines try to capitalize on the COVID-19 crisis to make long-term market share gains.
After Thursday's rally, American Airlines' market cap has fallen by just $5 billion year to date -- considerably less than the company's likely 2020 cash burn. With bankruptcy a very real possibility if the nascent demand recovery falters later this year (due to a surge in new COVID-19 cases, for example), investors should stay far away from American Airlines stock.