Will American Airlines Go Out of Business? - Financhill

Will American Airlines Go Out of Business?

Will American Airlines Go Out of Business? American Airlines Group Inc (NASDAQ:AAL) is the biggest airlines in the United States. In fact, it led the pack in “passengers carried” in 2019, with 215.2 million passengers and the largest fleet of 1,569 planes.

It seemed like the company was flying high until the coronavirus pandemic hit. Travel restrictions among states and countries are vastly different than they used to be, and the airline industry was among the hardest hit by global shutdowns and quarantines. Now it is up in the air whether American Airlines will go bankrupt.

Bankruptcy rumors floated around in the summer of 2020, but CEO Doug Parker denies it’ll happen, even with the government’s $5.8 billion bailout running out at the beginning of October.

He gave the government an offer of either providing another $25 billion package or it would need to furlough 19,000 workers.

Instead, it received a $5.5 billion loan from the Treasury Department using its frequent flier miles as collateral. This drove the company deeper into debt and crashed stock prices to a point they still haven’t recovered from the outbreak.

Let’s hop on board American Airlines to determine if we should expect a pending collapse or recovery.

Why Did American Airlines Stock Fall?

The entire airline industry dropped in February 2020 as travel restrictions were put into place. Flights were cancelled and delayed across the board for a period of about 90 days before travel started picking back up.

Entering the holiday season, it’s still down 64 percent from the prior year, and this is bad news for the company. This is because flights are only down by 48 percent, but social distancing rules mean they won’t be flying anywhere near full capacity.

And many of the flights that are running are being funded by travel vouchers issued in the wake of the COVID-19 cancellations.

Air travel to destinations like Hawaii has been all but shut down, and the demand for flights is weak as the population struggles to cope with the virus effects.

This caused American Airlines stock to nosedive, and it still hasn’t recovered, despite any government bailouts. Here’s a breakdown of the company’s financials through the year to understand what’s happening.

American Airlines Financials Are Nosediving

American Airlines took massive losses starting in the first quarter of 2020, with $2.2 billion in net losses, which equates to $5.26 per share.

This is despite bringing in $8.5 billion in revenue, and things didn’t get better in the second quarter, with $2.1 billion in net losses.

With operating costs over $40 billion per year, the c-suite is focused on cost-cutting initiatives to stay above water.

It estimates these initiatives will reduce 2020’s operating expenses by $15 billion, but that’s only half the battle.

It still has over $10 billion in cash reserves, and its daily cash burn rate was slowed from $100 million per day in April to $30 million per day in June.

Analysts estimate the third quarter earnings report in October will be along the same lines, as travel still hasn’t picked up.

Airlines for America estimates passenger revenues will drop $314 billion from 2019. But to fully understand the company’s financials, you need to understand the terms of its bailouts.

American Airlines Bailout

In the aftermath of the coronavirus pandemic, the U.S. Treasury Department issued a $50 billion bailout to the passenger airline industry through the CARES Act.

Treasury secretary Steven Mnuchin said the agreement is meant to “preserve the strategic importance of the airline industry” while ensuring the government gets its piece of the pie. American Airlines received $4 billion in grants and $6.5 billion in low-interest loans in this initial bailout.

The company then secured a $5.5 billion loan from the Treasury Department in Oct, but the Trump administration delayed any further bailout talks until after the election. This puts AA in a precarious position with debt.

AA Debt Levels

American Airlines has a massive pile of debt that makes it hard to see an upside in its revenues. The company has $31.27 billion in total debt, which is countered by its $64.54 billion in total assets.

This gives is a debt ratio of 0.48, and the company is refinancing as much of its debt as possible to help with that number. The combination of its lowered revenues and high debt makes investors uneasy, with most rating it either a Hold or Sell.

The only way for the company to pull itself out is to depend on consumer flight behaviors changing. Let’s examine how air travel is trending heading into the holiday season.  

Has Consumer Behavior Permanently Changed Toward Flying?

We know that the coronavirus shut down travel temporarily, but the long-term effects aren’t yet known. In fact, it’s becoming clear Covid-19 is just one of the plethora of infectious diseases we’ll battle every flu season.

According to the U.S. Travel Association, travel spending is 41 percent lower than the previous year as of October 2020, which is a small improvement over last week’s 42 percent drop.

While travel is picking back up, it’s nowhere near the levels it was heading into the pandemic.

One major factor is the absence of major live events. From summer music and cannabis festivals to business exhibitions and beyond, everything was virtual in 2020.

It’s still unclear when these types of events will pick back up in person, but the first quarter of 2021 appears to be largely virtual. And airlines aren’t alone in needing another stimulus to resume spending.

Will American Airlines Go Out of Business? The Bottom Line

American Airlines is the biggest in its industry, and that means it faces the biggest problems from the coronavirus shutdowns.

Travel restrictions and lack of adequate government stimulus packages have many wondering if the company can survive. A building pile of debt could mean bankruptcy is the only option, one that the CEO adamantly denies will take place.

Still, investing in American Airlines is a crapshoot until we know for sure the long-term effects of the pandemic on consumer travel. It’s picking back up, and people are trying to return to normal.

But iconic vacation destinations and business events alike are still leaning virtual through the first quarter of 2021. Even with another government bailout, the future is cloudy for AA.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.

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