The COVID-19 pandemic has decimated airlines' financial results in 2020. In the U.S., bookings and passenger traffic plunged steeply beginning in March as the pandemic spread. Despite a modest rebound in demand during May and June, both metrics remain dramatically below 2019 levels.
American Airlines (AAL 4.75%) has been one of the biggest casualties of this massive downturn. On Thursday morning, the airline giant reported extremely weak results for the second quarter and didn't give investors much reason to be optimistic about the future, either.
A massive loss and substantial cash burn
American Airlines didn't cut quite as much capacity as its top competitors during the second quarter, partly because it saw an opportunity to capture pockets of demand late in the quarter. For Q2 as a whole, the carrier reduced capacity 76.4% year over year. For comparison, Delta Air Lines (DAL 3.03%) cut capacity by 85.2% and United Airlines (UAL 2.13%) slashed capacity by a remarkable 87.8% last quarter.
American's management claims that this (comparatively) aggressive capacity plan was the right move. A look at its financial results suggests otherwise.
First, American Airlines' revenue plummeted 86.4% year over year in the second quarter: not much better than United's 87.1% revenue drop -- or Delta's 90.6% decline in adjusted revenue, for that matter. As a result, American posted an adjusted net loss of $3.4 billion for Q2: significantly higher than the adjusted net losses of $2.8 billion and $2.6 billion reported by Delta Air Lines and United Airlines, respectively.
Second, American Airlines' daily cash burn averaged $55 million last quarter. While this was better than management's initial projection, that doesn't mean much, as every major U.S. airline seems to have outperformed its cash burn estimates last quarter. Delta's average daily cash burn was $43 million and United's was just $40 million. For perspective, that means each of those carriers saved over $1 billion relative to American Airlines, despite being similar in size.
The pain will continue this summer
Most airlines have been hesitant to give firm forecasts for the third quarter, because the facts on the ground are changing rapidly. However, based on the information that is available, it appears that American is set to underperform its major rivals once again this quarter.
During American Airlines' earnings call, management estimated that the company would end the third quarter with about $13 billion of liquidity. As one Wall Street analyst noted, that implies average daily cash burn of at least $35 million, and possibly as much as $40 million. This would be worse than the company's June average daily cash burn of $30 million, reflecting a recent slowdown in bookings associated with rising COVID-19 cases and new restrictions in many parts of the U.S.
By contrast, United Airlines said earlier in the week that it would probably burn about $25 million a day this quarter. Delta didn't provide a specific forecast, but it said that cash trends for the month of July would likely be in line with June's average daily cash burn of $27 million.
A weak balance sheet is getting even weaker
Aside from its short-term earnings underperformance this year, American Airlines entered 2020 with the worst balance sheet by far among major U.S. airlines. The COVID-19 crisis is making a bad situation worse.
By the end of the second quarter, American Airlines had an even $40 billion of debt and lease liabilities, not to mention $6 billion of net pension and post-retirement benefits. Furthermore, to boost liquidity to $13 billion by the end of Q3, American Airlines recently arranged a new $1.2 billion secured borrowing from Goldman Sachs and expects to finalize a $4.75 billion secured loan from the Treasury Department later this quarter.
All in all, American Airlines is on track to end 2020 with more than $50 billion of debt, lease, and pension liabilities. And while the carrier hopes to return to positive cash flow next year so that it can start repaying some of these liabilities, doing so will depend on a meaningful improvement in demand, which may or may not materialize. As a result, while there's a case to be made for betting on an airline industry turnaround, investors should continue to steer clear of American Airlines.