Estimated read time: 4 minutes
Publication date: 18th May 2021 11:17 GMT+1
In the last year, airline companies faced their worst fears as the COVID-19 pandemic brought the world to a standstill. The rise in infection rates meant governments had to impose economic lockdowns as well as shut international borders. The airline sector was one of the worst hit amid the ongoing pandemic. However, given that vaccinations in the U.S. and other developed countries are rolling out at an accelerated pace, economic activity and leisure travel should gain momentum by the end of 2021, making stocks such as American Airlines (NASDAQ: AAL) a good bet right now.
Recent Q1 results
In the first quarter of 2021, American Airlines reported revenue of $4 billion which was 53% lower compared to the prior-year period. This decline was due to a 39% fall in total available seat miles. Its Q1 net loss stood at $1.3 billion or $1.97 per share.
In order to improve its liquidity position, American Airlines raised $10 billion via debt and used a portion of the proceeds to pay back the secured loan from the U.S. Department of Treasury. The company ended Q1 with $17.3 billion in total liquidity and expects to end Q2 with around $20 billion in liquidity.
In the last 12-months, AAL has posted a higher net loss compared to peers. In Q1, the company’s adjusted pre-tax loss stood at $3.5 billion. These figures for United Airlines (NASDAQ: UAL) and Delta Airlines (NYSE: DAL) stood at $3.1 billion and $2.9 billion respectively.
What next for AAL stock?
American Airlines confirmed that demand has continued to increase since the second half of February and net bookings are close to 2018-2019 levels in the last few weeks. The company claims in order to cater to improved demand, it is rebuilding its schedule at a higher rate compared to peers.
In Q2, AAL expects capacity to lower between 20% and 25% compared with 2019. Comparatively, Delta Airline forecasts to reduce its capacity by 32% while United Airlines has forecast a 45% decline in capacity in Q2 compared to the same period in 2019. It also suggests American Airlines will generate higher sales compared to peers in the June quarter, thereby gaining considerable market share.
AAL CEO, Doug Parker said, “Looking forward, with the momentum underway from the first quarter, we see signs of continued recovery in demand. We remain confident the network enhancements, customer-focused improvements and efficiency measures we’ve put into place will ensure American is well-positioned for the recovery.”
In the June quarter, American Airlines has forecast its adjusted pre-tax margin between -27% and -30%. Its revenue is forecast at $7.2 billion which means its pre-tax loss will be close to $2 billion.
American Airlines focuses on cost savings
In 2021, American Airlines plans to incorporate over $1.3 billion in permanent non-volume cost reductions. It includes $500 million in management reductions, $600 million in labor productivity enhancements, and $200 million in other cost reductions.
In Q1, the company reduced its average cash burn rate to $27 million after including $9 million in debt payments and cash severances.
In March, its estimated daily cash burn rate was just $ billion. Further, if we exclude $8 million per day of debt principal payments and severance payouts, its cash burn rate was positive in the month of March.
The final takeaway
The airline industry is a capital-intensive one and companies here have underperformed the broader markets by a huge margin in 2020. Warren Buffett sold off his investments in airline stocks and vowed never to enter this space again.
According to Buffett, a sustainable competitive advantage for airline companies has been elusive for several decades due to the constant addition of passenger capacity and the capital-intensive nature of this business. Airline companies in fact have been struggling to consistently grow bottom-line despite their ability to increase revenue.
Further, they are part of a cyclical industry making them vulnerable during economic downturns. While the financials might improve going forward, American Airlines and peers remain a high-risk bet for long-term investors.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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