American shares lost 60% of their value during a five-week period beginning in mid-February, as COVID-19 fears swept the globe. The stock at times has acted like a volatile penny stock in the months since, as investors search for signs of a turnaround.
American Airlines stock is certainly more affordable now than it was heading into the year. But just because the shares are inexpensive, that doesn't make them a bargain. Here's a look at whether American Airlines is a good buy today.
Demand is weak, and isn't likely to get better
American posted an adjusted net loss of $3.4 billion in the second quarter, on revenue that was down 86.4% year over year. The airline's drop in revenue was hardly better than declines posted by rivals Delta Air Lines and United Airlines, despite American moving more quickly than competitors to restore service late in the quarter in response to an uptick in demand.
Traffic has rebounded from March and April lows but still is off about 70% year over year, according to Transportation Security Administration statistics, and is unlikely to shoot up any time soon.
Most of the demand right now is coming from vacationers and other leisure travelers. American, with several hubs in the Sun Belt (in Charlotte, Miami, Dallas, and Phoenix), is well-positioned to soak up that demand. But as the summer ends, that demand will evaporate. With businesses working from home and travel budgets slashed, there isn't much out there to fill the hole.
In July, American Airlines notified 25,000 employees -- about 20% of its total workforce -- of possible layoffs. Additionally, the company said recently that it is planning to cut service to at least 15 cities after government funding provided as part of the CARES Act expires on Sept. 30.
Demand is likely to be anemic until there is a generally-available COVID-19 vaccine, which is likely not until the second quarter of 2021 at the earliest. And even when there is a vaccine, it's hard to know what the economy will look like and how quickly lucrative business travel will return.
Debt will be an issue for years
American ended the second quarter with over $10 billion of liquidity, but a significant portion of that comes from new borrowings. The company's total debt stood at more than $40 billion as of June 30, including leases and pension obligations. And the airline expects to continue to borrow, including from the U.S. Treasury, as part of its effort to maintain ample liquidity.
Like the entire industry, American Airlines is losing money on operations right now. It burned through $55 million per day in the second quarter. Although that was better than management had forecast, it was still worse than Delta's $43 million average daily burn and United's $40 million figure.
American Airlines officials said on the second-quarter earnings call that the goal is to stop the bleed and turn cash positive in 2021, but they are counting on improving demand more than further cost cutting to reach that goal. During the call, CEO Doug Parker said stopping the cash burn "certainly requires some demand growth, but we don't think unreasonable demand growth."
As cash starts coming in the door, the priority will be to pay down debt. Expect it to be a long, slow process. American has billions in debt it can pay off early, but given the expected sluggish demand environment, it will likely be mid-2021 at the earliest before cash is coming in at a rate that could make a dent in the total.
American's rivals all have their own balance sheet issues to address in the years to come, but even before the pandemic, American's high debt load was an issue that needed to be sorted out. Expect American's balance sheet issues to take years to address.
American's better days are a long way off
American Airlines, for all its warts, has done an admirable job navigating through this crisis. In years past, the weakest carriers inevitably succumbed to bankruptcy when times got tough. As of today, it appears American will be able to weather the storm without a filing.
On the earnings call, Parker said the one bright spot to come out of the travel slowdown is that it has provided a chance to reboot the airline, allowing management to scrutinize the operation and make tough choices.
That's going to make us much more efficient as we come out of this, and we're excited about that. So we're going to add back only what makes sense. We'll come through it more efficiently. I'm looking forward to that day when we're through all this, and we have that advantage.
Maybe so, but that's going to take a long time to play out. In the meantime, a lot of other airlines should be able to recover before American does. Even if you are bullish on an airline recovery, I'd advise against buying American Airlines shares.