Last week, two of the three largest airlines in the world reported their third-quarter earnings results: Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL). Both companies reported hefty losses and average daily cash burn of approximately $25 million for the quarter. While these results were bad by any objective measure, they were far better than the carriers' second-quarter results, and roughly matched the forecasts Delta and United had laid out in July.
Later this week, it will be American Airlines' (NASDAQ:AAL) turn to report earnings. As the most indebted major airline, the stakes are especially high. Here are the two most important things for investors to focus on.
How does cash burn stack up?
Like its peers, American Airlines almost certainly slowed its cash burn last quarter relative to the second quarter. That said, American burned significantly more cash than either Delta or United in Q2, and there's good reason to suspect that this trend continued in Q3.
First, American Airlines provided liquidity guidance three months ago that implied average daily cash burn of at least $35 million -- and perhaps as much as $40 million. That would be a good deal worse than its rivals.
Second, American made a risky bet on a rapid demand recovery over the summer, restoring capacity at a faster pace than its full-service airline peers. However, while passenger throughput at TSA checkpoints nearly doubled from 14% of 2019 levels at the beginning of June to 25% near the end of the month, volumes didn't break 30% of prior-year levels until late August. In short, American Airlines brought capacity back online too quickly. That may have reduced cash burn in June, but it probably hurt the carrier last quarter.
Investors should also look for any hints or guidance about cash burn for the upcoming quarter. For reference, Delta Air Lines expects cash burn to slow to just $10 million a day by the month of December.
American Airlines isn't in any near-term danger of running out of cash. It had $10.2 billion of liquidity at the end of June, borrowed $1.2 billion privately in September, and is eligible for up to $7.5 billion of secured loans from the federal government. That said, it had a heavy debt load even before the crisis began, and additional borrowing will make it harder for American to recover. The expiration of federal payroll support aid several weeks ago makes it even more vital for American Airlines to limit cash burn.
To what degree is demand recovering?
The other major question for American Airlines investors ahead of earnings relates to the demand environment. As noted above, following a period of rapid sequential improvement in June, the demand recovery stalled for much of the summer, largely due to rising COVID-19 cases.
On the bright side, demand has continued to improve at a steady pace in recent months. On Sunday, the TSA screened more than 1 million passengers for the first time since mid-March. Passenger throughput was still down 60% year over year, but that's not bad for an off-peak weekend, given that demand was down by 70% or more for most of the summer. The recent rise suggests that people are gradually growing more comfortable with air travel, which bodes well for Thanksgiving and Christmas.
On the other hand, COVID-19 case numbers are rising again across much of the U.S. So far, this hasn't seemed to impact air travel demand, but if the recent upward trend in case numbers continues, it could spoil the Thanksgiving and Christmas peak periods. A ruined holiday season would be extremely costly for airlines.
Demand trends can change on a dime, so investors should take any comments from management with a grain of salt. Nevertheless, any data on recent ticket sales trends would help investors gauge the likelihood of American Airlines significantly reducing its cash burn in the current quarter.