American Airlines (AAL): Failure Is Not An Option

American Airlines Group (AAL) traded far below $10 because the market viewed bankruptcy as a risk. The CEO was clear at the recent Bernstein Strategic Decisions Conference that bankruptcy should be seen as failure, not a financial tool.

The company is busy reducing daily cash burn even with a zero-revenue scenario. With traffic already rebounding, the airline is poised to rally further with the industry rebound while investors should now have confidence to buy the airline stock on dips knowing failure isn’t an option in the future.

What’s interesting is that its popularity among investor is rising. In the past 30 days, the change in the number of best-performing portfolios holding AAL on TipRanks increased by 5.5% — a pretty massive leap when you think about it. This gives the stock a “very positive” investor sentiment.

Traffic Rebound

The biggest solution to what ails airlines is a rebound in traffic. At the depths of the crisis in mid-April, passengers going through the TSA checkpoint were down 96% from 2019 levels. In the last week, passenger levels have returned to 16% of 2019 levels with June 7 traffic reaching 441K.

The airline industry is still dealing with Disneyland not opening until July 11, Hawaii requiring a 14-day quarantine and cruise ships not restarting until at least August 1. All of these factors contribute to reduced demand due to a lack of open destinations for leisure travel.

Back at the end of April, Warren Buffett sold the airlines due to fears that passengers wouldn’t return to airlines until a vaccine existed. The biggest question now is how quickly traffic levels can rebound to 25% or 50% of 2019 levels.

According to a survey conducted by American Airlines, business travelers were originally banned at 66% of companies in early April in the middle of the virus fears and now the complete travel ban is down to 47% of companies. These numbers support a quicker rebound in the more profitable business travelers than originally feared.  

Cash Burn

At the Bernstein conference, American Airlines CFO Derek Kerr made it clear that the airline was on target to reach the $50 million daily cash burn rate in June. In addition, the company is on a path to reduce the cash burn to between $40 million and $45 million with the catch of this number is based on a zero-revenue environment.

The problem with most of the airlines and especially American Airlines is the executives providing worse case cash burn rates excluding ticket sales improving and the Payroll Support Program payments. These worse cases present scenarios where the airline could face bankruptcy risk, but the recent traffic rebound isn’t going to present a zero-revenue environment.

American Airlines could easily see revenues reach 20% of 2019 levels here in June or July providing over $25 million in daily revenues at a time when the cost portion of the cash burn rate was forecast to slip below $50 million. At the same time, the airline has nearly $23 million in daily PSP support until September 30 where the airline is allowed to cut the excess payroll cost covered by the PSP.

Takeaway

The key investor takeaway is that the next catalyst for an airline stock like American Airlines is air passenger traffic returning to 20% of 2019 levels. Once the airlines start including a reasonable rebound in traffic levels into daily cash burn forecasts, the stocks will rally.

American Airlines just dipped back to $18 on fears of a second virus wave. The stock has plenty of upside remaining considering the stock traded at $30 prior to the virus crisis, especially if the company reaches profitability in 2021 despite lower traffic.

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Disclosure: No position.