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Sunday, December 6, 2020

Breakeven Gets Closer For American Airlines Stock

The fear of the second round of COVID-19 attack has taken its toll on the market of domestic airlines. American Airlines stock has seen a 36% rise in TSA traffic as of the levels of 2019. The daily cash burns are seeing a good amount of progress even when the American Airlines Group (AAL) is anticipating some hits. 

American Airlines Stock Cash Burn Rates Misconceptions

Due to some reason or the other, American Airline companies seem to scare away investors with unrealistic numbers. In Q3 the same was done for the cash burn rates. 

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In June the $30 million daily burn rate was reported by the Q3. The American airlines stock finally reached $44 million creating the investors of the guard. CEO Doug Parker said that their burn rates had improved daily by $14 million per day in the third quarter moving from $58 million to $44 million. He added that they are expecting an increase of $25 to $30 million each day in the fourth quarter soon as the traveling conditions normalize. 

In reality, the American Airlines Stock was daily burning $36 million cash in Q3 not even providing the improving rates of September. David Kerr the CFO explained that the $8 million extra was not being included in the burn rates normally. Instead, it is being considered as the dept principal and severance burn rates.

However, American Airlines was not releasing the actual cash burn rates. Instead, they were bringing in the items that are non operating to present cash flow rates more than the actual. The $2.5 billion was kept excluded by the US Treasury through the CARES Act to sustain the cost of the payrolls, more than the actual need by the current demand of passengers. None of these details was provided by the Airlines until the analysts insisted on the matter. 

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It has to be understood that the amount of money being spent to meet up debts and severance costs are not crucial factors to judge the progress of the cash burns. In reality, the cash burn rate is around $17 million to $22 million and is on the verge of the $21 million targets set by United Airlines (UAL). 

Cash flow break-even has to be reached by the company to sustain itself in the market. The American Airline stock is much closer to the breakeven in the market. Adding to that there has been an increase of $5 billion in the net debt. The condition of the airline is not as bad as expected by the price of the recent stock. The investors should keep in mind that the American Airlines stock has still generated $3.7 billion as operating income in the previous year even after hitting a low from 737 max groundings.

In the case of the American Airlines stock, it’s not great that they are highlighting the incorrect rates of the stocks. Despite the difficult traffic troubles, the investors should utilize the pandemic and election situation.

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