Airlines burned through huge sums of cash in the first 12 months of the pandemic. But air travel demand has come roaring back recently, thanks to the accelerating rollout of COVID-19 vaccines and a decline in new case numbers from the peak levels seen a few months ago.
This week, American Airlines Group (NASDAQ:AAL) and United Airlines Holdings (NASDAQ:UAL) told investors that this resurgence in demand lifted their underlying cash flow into positive territory in March. That's an important step forward for these two massive U.S. airlines.
Pent-up demand is finally emerging
U.S. air travel demand remains well below pre-pandemic levels, but demand trends have improved rapidly over the past two months.
Indeed, during the first seven days of February, passenger screenings at Transportation Security Administration checkpoints were 62% lower than during the comparable period of 2019. By contrast, screenings were down just 39% relative to 2019 last week.
Barring any major setbacks, air travel volumes -- at least in domestic markets -- should improve further as more Americans are vaccinated and the summer peak season approaches. In late March, American Airlines reported that net bookings had reached 90% of 2019 levels. This almost certainly reflects a lengthening of the booking curve, as travelers grow more comfortable making plans months in advance. (In other words, customers are increasingly buying tickets for travel later this spring and over the summer.)
An abrupt improvement in cash flow
The recent acceleration in ticket sales is doing wonders for airlines' cash flow. After all, customers generally pay for tickets when they book travel, not when they fly.
For example, American announced this week that daily cash burn averaged just $4 million in March. That represents a remarkable sequential improvement compared to January and February, given that management estimates average daily cash burn of $27 million for the first quarter as a whole. Furthermore, cash severance costs and debt principal payments averaged $8 million a day in March. Excluding those items, underlying cash flow was positive last month.
Similarly, United Airlines reported that "core cash flow" turned positive in March due to an acceleration in bookings for future travel. For the full quarter, United limited core cash burn to around $9 million a day on average, a solid result given the ongoing headwinds from the pandemic.
Don't celebrate just yet
Returning to positive cash flow is an important symbolic step on the road to recovery for American and United. That said, investors shouldn't be fooled into thinking that these companies face smooth flying now.
First, airlines have adopted a variety of non-standard definitions of cash flow during the pandemic. For example, United excludes capital expenditures as well as "investments in the recovery" from its calculation of core cash burn. American treats debt issued to finance aircraft purchases as a cash inflow. These metrics made sense when investors' primary concern was evaluating the risk that airlines would run out of cash. But they can serve to sugarcoat airlines' performance relative to a standard calculation of free cash flow.
Second, American and United have both taken on a significant amount of incremental debt since the pandemic began. They will have to repay some or all of this debt in the years ahead, reducing the amount of cash they can return to shareholders.
Third, both airlines have uncertain long-term free cash flow prospects. On the positive side, they will emerge from the pandemic with lower costs. But they will face increased competition from low-fare airlines in domestic markets. Meanwhile, business travel demand may not recover all the way to 2019 levels.
With demand and cash flow improving, perhaps American Airlines and United Airlines shares would be worth a look at the right price. Yet both companies' enterprise values are higher than they were at the beginning of 2020 (a remarkable 23% higher, in the case of American). Investors can surely find more-attractive places to put their hard-earned money.