A surge in U.S. COVID-19 case numbers finally caught up to airlines last month, causing air travel demand to sag. With government officials in many parts of the country urging or mandating restrictions on travel, the end-of-year peak period is likely to be a bust, too. As a result, many airlines are backing off of their previous cash burn projections for the fourth quarter.
In recent days, two of the largest U.S. airlines -- American Airlines (AAL 0.99%) and Delta Air Lines (DAL 0.17%) -- have done just that. Does this mean that it's time to sell these airline stocks? Let's take a look.
The air travel recovery has stalled out again
On the Sunday after Thanksgiving, 1.18 million people passed through TSA checkpoints: the most for any day since mid-March. However, that TSA throughput figure still represented a 59% year-over-year decline. Moreover, throughput was up very modestly compared to mid-October, which is not a peak travel period.
In short, even a major holiday failed to spark a correspondingly large uptick in air travel. As we've moved past the Thanksgiving peak in recent days, demand has plummeted. On Dec. 4, just 753,951 people passed through TSA checkpoints: less than a third of the prior-year figure. Additionally, booking activity has been slowing (and cancellations increasing) for several weeks. If anything, that trend will worsen in the weeks ahead, as states and local governments implement new rules and guidelines to slow the spread of the coronavirus.
A setback for cash burn
When U.S. airlines announced their fourth-quarter outlooks in October, the latest wave of the pandemic had begun, but it hadn't impacted travel demand yet. At the time, most airline executives were cautiously optimistic that people were growing more comfortable with air travel during the pandemic. They therefore expected that demand would continue to improve gradually over the course of the quarter.
In light of the latest demand setback, many airlines realize that their initial Q4 cash burn forecasts were too optimistic. In a memo to employees on Thursday, Delta Air Lines CEO Ed Bastian noted that there had been a slowdown in demand and future bookings. As a result, the airline now expects average daily cash burn between $12 million and $14 million this quarter. Previously, Delta had projected that average daily cash burn would be between $10 million and $12 million.
On Friday, American Airlines acknowledged a similar slowdown in demand and future bookings in an SEC filing. The company also noted that fuel prices have increased since October. As a result, American said that average daily cash burn will likely come in near the high end of its previous guidance range of $25 million to $30 million during the fourth quarter.
Every airline calculates cash burn a bit differently. As a result, the cash burn figures shared by Delta and American aren't 100% comparable. But even on an apples-to-apples basis, American Airlines is burning far more cash than its rival, despite the two being similar in size.
Notwithstanding the increased projections for cash burn, shares of both airline stocks are trading at multi-month highs. Investors appear to be looking toward 2021, when a mass vaccination campaign could potentially end the pandemic, sparking a rebound in air travel demand.
Two completely different situations
While American and Delta are seeing broadly similar demand trends, that doesn't mean these two airline stocks are equally good or bad investments. In fact, Delta Air Lines stock looks like it could have more upside, whereas American Airlines stock has probably risen too far.
For example, American Airlines' higher Q4 cash burn suggests that it won't reach cash breakeven as soon as Delta. Making matters worse, American Airlines has less liquidity than Delta (though still plenty to make it through the next year). It also has far more net debt -- nearly $40 billion, including pension and lease liabilities -- even after substantially diluting shareholders' interests through a series of equity issuances this year.
Every incremental dollar of cash that American Airlines burns will make it that much harder to recover, due to the company's crushing debt burden. (Alternatively, it will force the airline to dilute shareholders further with additional stock sales.) If business travel demand recovers slowly, as many airline executives expect, American could survive the pandemic but still run into financial distress a few years down the road as its debts start to come due. Thus, the recent rally looks like a great opportunity to sell American Airlines stock.
By contrast, Delta is on track to end 2020 with less than $20 billion of adjusted net debt, even though it hasn't issued any equity this year. That's a manageable amount to repay after the pandemic ends, even in a slow-recovery scenario. As a result, Delta Air Lines stock could continue moving back toward pre-pandemic levels as demand rebounds over the next few years.