After near bankruptcy in 2012, American Airlines Group (NASDAQ:AAL) staged a solid comeback to the number one spot. In 2020 however, no travel or entertainment could escape the contamination of the coronavirus that has caused an unprecedented slowdown in the sectors. As the spread of the virus quickly made the United States the most infected country in the world, the fear of infection seeped into the public following which passenger volumes are down to 92%, after a steep recovery from 95% down.
Following the unprecedented fall in demand the aviation sector was looking at a complete collapse and mass unemployment. Due to the cost-intensive nature of the business and little to no revenue, the airlines looked to the government that stepped in with a $25 billion support grant and collateralized loans. Under the CARES Act, American received $5.8 billion, mostly in grants, and $4.8 billion in loans from the Treasury (American Airlines). The company has the highest cash-burn of all operators, ranging between $50 million and $70 million a day.
As a result of contamination fears and social distancing, airlines are being forced to offer just 60% of all seats on airplanes. Sadly, lower capacity does not result in lower costs. As the outlook of the sector looks bleak, airlines have started to face hurdles in raising fresh capital. Earlier in the month, United Airlines was forced to scrap its $2.25 billion senior bonds despite offering an 11.5% yield. Investors are expecting unfeasible yields due to the risks involved. (WSJ)
This is where American Airlines’ worries start. The company announced at earnings that it expects to have about $11 billion in liquidity at the end of Q2. What is scary is that almost all of this was received from the government ($10.6 billion total from CARES and the Treasury). The company expects a cash burn of $6 billion for the quarter and $4.5 billion for Q3. Hence, the airline might face a huge liquidity crunch as the last two quarters of the year can burn through all available liquidity. (Forbes)
The company also has a mammoth $40 billion of debt on its books, $2.78 billion of which is due this year, $3.5 billion due in 2021, $2.3 billion due in 2022, $4 billion in 2023, $1.5 billion in 2024 and $9.6 billion post-2025. Given that the company is very tight on liquidity, it has $2.7 billion due at the end of this year, and another $15 billion due over the next five years, American Airlines might be looking at bankruptcy again. (Seeking Alpha)
The company is backed into a corner as new debt would almost certainly be very expensive and new equity will be very cheap if demand doesn’t rebound strongly.