In recent years, American Airlines Group (AAL -2.92%) has been a chronic underperformer within the airline industry. That didn't change during 2020, a year defined by the pandemic.
On Thursday, American reported another quarter of financial results that were weak (albeit slightly better than feared). And while management is touting various actions to cut costs and boost profitability, American Airlines' massive debt load is likely to hobble the company's performance for the foreseeable future.
Cash burn continues
American generated $4 billion in revenue last quarter and posted an adjusted net loss of $2.2 billion ($3.86 per share). Both metrics were slightly better than analysts' expectations. That said, while American produced the most revenue of any U.S. airline in the fourth quarter, it also lost the most money.
Furthermore, while its cash burn slowed sequentially, the company still burned an average of $30 million of cash per day last quarter, equivalent to a staggering $11 billion annually. By contrast, Delta Air Lines (which is similar in size) limited its fourth-quarter cash burn to an average of $12 million per day.
Management expects cash burn to continue at a pace of around $30 million per day during the first quarter (which includes $9 million per day of debt and severance payments). Luckily for the company, the government is effectively picking up the tab in the first quarter. American Airlines expects to receive $3.1 billion of payroll support funds this quarter, including $2.2 billion of outright grants.
Can cost-cutting fix American's problems?
During the earnings call this week, management said that the company had implemented $1.3 billion of permanent structural cost cuts. American has finally slimmed down its previously bloated management structure.
It has also accelerated fleet upgrades that will allow it to carry the same amount of traffic with fewer airplanes and much less complexity. Importantly, the Boeing 737 MAX's return to service should also help the company's cost structure relative to 2019.
Bulls may hope that these cuts will allow American Airlines to emerge from the pandemic in a stronger position. But the COVID-19 crisis has pushed every major airline to critically reexamine its cost structure. They will all emerge from the pandemic with lower costs. That will lead to lower fares in the future (all else equal) due to the nature of free-market competition.
Unless American has reduced its costs more than its peers, its profitability is unlikely to be higher than it was before the pandemic. Alas, there's no sign that it's cutting costs any faster than other big airlines. For example, United Airlines announced earlier this month that it had identified $2 billion of annualized structural cost reductions.
High debt and stock sales loom over shareholders
Even if American Airlines eventually does manage to improve on its subpar pre-pandemic margins, it will take a few years to reach that new normal. When it gets there, it will have to cope with a dreadful balance sheet.
Entering 2020, American had $39.5 billion of debt and pension liabilities, which was already the heaviest debt load among major U.S. airlines. By year-end, it had more than $48 billion of debt, lease, and pension obligations, offset by $6.9 billion of unrestricted cash and investments.
American has been steadily selling new shares of stock to raise cash, which is a prudent move. That said, it dilutes existing shareholders' stakes in the company, reducing the stock's upside potential. Moreover, unless the carrier ramps up stock sales further, its net debt will continue to rise in 2021, due to its underlying cash burn and new aircraft deliveries (which will be financed by new debt and lease obligations).
American Airlines' high debt load will force it to spend virtually all of its free cash flow on debt reduction for the foreseeable future. Add that to the massive dilution shareholders are experiencing, and there's no reason to invest in this troubled company today.