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Why Shares of American Airlines Are Falling Today

By Lou Whiteman – Jun 22, 2020 at 12:56PM

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The company is selling shares and adding to its debt.

What happened

Shares of American Airlines Group (AAL -1.71%) traded down more than 6% as of 12:30 p.m. EDT Monday after the airline said it would raise $3.5 billion in new financing. It will get some of that new capital by diluting existing shareholders, and the stock is taking a hit as a result.

So what

American and other airlines are in survival mode, with demand plummeting due to the COVID-19 pandemic. There have been some indications in recent weeks that travel demand is slowly beginning to creep higher compared to April lows, but it will likely take years for traffic volumes to return to prepandemic levels.

An American Airlines plane exits a hanger.

Image source: American Airlines.

With the recovery expected to be slow, the airlines are aggressively adding to their cash balances to ensure they can ride out the storm. American on Sunday said it was selling $750 million in new shares and raising a similar amount via convertible notes due in 2025. The airline is also offering $1.5 billion in new senior secured notes and has entered into a new $500 million term loan facility.

American expects to burn through about $40 million per day in June, but hopes it can get that number down to breakeven by the end of 2020. But with new COVID-19 cases on the rise in a number of key states, it is impossible to say for sure those targets will be reached.

The debt is expensive. American's secured notes are expected to yield about 12%, according to Bloomberg, a significant premium to what nonairlines are paying in this low-rate environment and well above the 7% yield Delta Air Lines was forced to pay on a $3.5 billion secured bond back in April.

Now what

In the short term, secondary offerings hurt shareholders because they mean the pie is divided into even more pieces, meaning each individual share is worth less. And it is going to take American a long time to pay down all this expensive debt, meaning interest payments are going to eat into earnings for years to come. But given the plight American is in, this still looks like a good long-term move.

The big risk for shareholders is a second wave of the pandemic, which could further depress travel demand and delay an already slow recovery. In a worst case, American runs low on cash, forcing the airline to seek bankruptcy protection and in all likelihood wiping out the equity.

After the offerings, American will have $3.5 billion in additional cash to get through the crisis. That's good news for long-term holders.

Lou Whiteman owns shares of Delta Air Lines. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.

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