The U.S. third quarter earnings report found that the carrier’s underperformance continued – and that’s bad news for investors. We will take a look.
Adding back capacity didn’t help burn money
As I noted in my results overview, American Airlines restored capacity faster than its competitors Delta Airlines (NYSE: DAL) and United Airlines (NASDAQ: UAL) this summer. This represented a risky bet on pent-up demand resulting in a big sequential improvement in domestic air travel during the traditional holiday season. Unfortunately for American and its shareholders, demand has recovered from its April low at a very modest pace.
As a result, daily cash consumption averaged $ 44 million per day in the third quarter. It was even worse than American Airlines advice had suggested.
This cash consumption figure was worse than what Delta and United also reported. Excluding severance pay and debt principal repayments, American burned $ 36 million a day in the last quarter, compared to $ 24 million a day for Delta and $ 21 million a day for United.
Not surprisingly, American Airlines’ adjusted pre-tax loss of $ 3.6 billion also exceeded those of Delta Air Lines ($ 2.6 billion) and United Airlines ($ 3 billion). Notably, he lost more money and burned more cash than Delta and United despite generating around 25% more income than them. (This only underscores how the U.S. plan to quickly restore capacity to capture summer demand has backfired.) Still, those numbers are less important than cash consumption in today’s environment.
A mixed vision
American Airlines’ outlook for the fourth quarter was also somewhat disappointing. The company expects daily cash consumption to average $ 25 to 30 million, with $ 8 million of that daily consumption coming from severance pay and principal debt repayment. This roughly matches United’s cash consumption projections. However, this is worse than the scenario presented by Delta, which projects daily cash consumption (excluding severance pay and debt principal repayment) to slow from $ 18 million last month to around $ 10 million in December.
It’s also important to note that American has had to lay off a substantial portion of its workforce just to move closer to consuming cash from its full-service rivals. United has laid off fewer workers and so far Delta has not laid off anyone. The recall and retraining of workers on leave (especially pilots) will result in additional expenses for American Airlines over the next two years.
Drowning in debt
American Airlines ended the last quarter with $ 13.6 billion in cash, including $ 8.3 billion in unallocated cash and short-term investments. Thus, he does not face any risk of immediate bankruptcy. However, he also had $ 47.5 billion in debts, rents and pensions as of September 30. That number will likely be well over $ 50 billion by early next year as Americans rely on subsidized guaranteed loans from the federal government.
Management says that as demand recovers over the next several years, American will be able to start paying down debt quickly, especially as it has cut back on its short-term capital spending plans. Still, there’s a good chance the company won’t start generating positive cash flow again until 2022. What’s more, it will eventually need to replace the nearly 100 mainline jets it retired this year, as well as over 200 others who are currently around 20 years old. This will force it to increase its capital spending (capex) again before too long (but not to levels of a few years ago).
In short, American Airlines is going to be operating with a ton of debt for the foreseeable future, with billions of dollars falling due each year. Since it is unlikely to generate enough cash to repay all of its debt maturities, some will need to be refinanced – perhaps at significantly higher rates. (The American issued secured debt at an interest rate of 10.75% last month; earlier this year he was able to issue unsecured debt with a coupon of just 3.75%.)
Moreover, if US debt remains high during the next downturn, creditors may lack patience. Until the airline makes significant progress towards its debt reduction goals, investors should avoid shares of American Airlines.