1 More Reason To Avoid American Airlines


Almost 2 months ago I showed you 3 Reasons To Avoid American Airlines Stock.

Here’s a brief recap of what I said then about avoiding the stock before we get to today’s article…

If you want to read the full article on why you should avoid American Airlines use the link above.

3 Reasons To Avoid American Airlines Stock

  1. It’s The Most Indebted Airline

As a percentage of its balance sheet, American Airlines (AAL) is the most indebted of the major 4 major US based airlines.

As of the most recent quarter its balance sheet is made up of 104.5% of total liabilities.  And its debt to equity ratio is unavailable due to the company’s enormous debt load.

The 104.5% total liabilities as a percentage of the balance sheet… That means the company has more debt than assets.  With no money left over for equity

In other words, after subtracting total liabilities from total assets there’s a negative number.  This means after subtracting debt from assets that the stocks equity has a negative value.

This is rare when you see this at an operating company.  But it’s horrible.

I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term.  And, to help insure I lose as little money as possible over time.

Typically, this means I invest in companies that have little to no debt compared to their cash and equity.

American has the opposite problem – in too much debt on an individual basis.   But also, when compared to its competitors.

United Airlines (UAL) balance sheet is 82.3% total liabilities and its debt to equity ratio is 1.98.

Delta Airlines (DAL) balance sheet is 79.2% total liabilities and its debt to equity ratio is 1.3.

And Southwest Airlines (LUV) balance sheet is 66.3% in total liabilities and its debt to equity ratio is 0.4.

American is the most indebted company of the 4 major US based airline stocks.  And this makes it enormously risky.

But there’s another reason to stay away from its stock.

2. It’s the Most Unprofitable Airline

In the most recent quarterly data American was unprofitable on a net income and a free cash flow basis.

These both due to increased costs related to the coronavirus.  And an almost complete stoppage in their business since then.

As of the its most recent financial release on April 30th, 2020 American was losing $70 million per day.

That means from mid-March to July 8th it lost an estimated $8.3 billion due to fewer flights and higher costs related to combatting the coronavirus.

Ouch.

Its Net income profitability margin in the trailing twelve months (TTM) period was negative 5.8%.  And its free cash flow to sales (FCF/Sales) margin in this same time was negative 4.2%.

EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.

Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.

But these were negative in the last quarter to a large degree.  Which means it lost a ton of money and is unprofitable over the last 12 months.

As a comparison United’s net income profitability margin in the TTM period is negative 1.5%.  And its FCF/Sales margin was 5.5%

Delta’s net income profitability margin in the TTM period is negative 1.2%.  And its FCF/Sales margin was 5.2%.

And Southwest’s net income profitability margin in the TTM period is negative 0.2%.  And its FCF/Sales margin was 6.6%.

These show the industry getting hammered in the last 12 months.  But that American is getting hit even worse than the others in its industry.

This is in part due also to its high debt load as well.

And there’s still one more reason to avoid American’s stock in the coming months.

3. Uncertainty Related To The Coronavirus

This all circles back to the beginning and the entire hospitality industry getting hammered by the coronavirus.

Air travel, hotels, and restaurants are still getting hammered.

This is a large problem for American and all other airlines now.  And another problem is that airlines worldwide aren’t operating at anything close to full capacity.

Both due to fewer people wanting to get on planes now.  And due to whatever limitations, the government puts on them to begin operating again.

Airline traffic is down 96% in April 2020 compared to April 2019 as of the most recently available airline traffic data in the US.

An estimated half of all airplanes are parked at airports and not flying.

And 1/3rd of all seats on most domestic flights remains unfilled due to social distancing restrictions.

The airline business at full capacity has razor thin margins.  So thin that over the entire history of airlines the industry combined is unprofitable.

We’ll know more for sure in the coming months as airlines release more up to date financial info.  But anything below full capacity means lower revenues, profits, and cash flows for this entire industry.

And with American already having the highest debt load and lowest margins this will negatively affect them more than its larger competitors.

I recommend you stay far away from this entire industry for the time being for the reasons above.  But especially stay away from American.

Especially now that coronavirus cases are spiking nationwide again with no end to this pandemic in sight as of this writing.

***

This has continued to prove out during this pandemic.

American Airlines (AAL) stock hit its 2020 high of $30.47 per share on February 12th, 2020.

As of this writing its stock is worth $13.59 per share.

This is an 55.4% drop in a matter of months.

And it’s not likely to improve anytime soon due to the still ongoing pandemic leading to far lower air travel.

Because people are continuing to avoid travel and this leading to massive revenue and profitability issues for American Airlines… The company is now essentially begging the US government to bail it out.

On August 25th, 2020, a letter written by American Airlines Chairman and CEO Doug Parker and President Robert Isom was released publicly essentially said…

If the US government doesn’t bail American Airlines out by October 1st… It will have to lay off another 19,000 employees.

Why October 1st?

Because that’s when the US governments first loan program to help airlines runs out.

Yes, this pandemic was an essentially unforeseeable issue affecting many industries worldwide.

And yes, companies can’t be expected to stay afloat in many circumstances with a 70% reduction in revenue.

But the issues at American Airlines are the fault of no one other than the same executives who are threatening to fire 19,000 employees if they don’t get bailed out.

  • It’s the executive’s fault that American Airlines is so inefficient.
  • It’s the executive’s fault that American Airlines is so unprofitable.
  • It’s the executive’s fault that American Airlines has an enormous amount of debt that is unsustainable in good times… But could lead the company to bankruptcy in crisis times like we’re dealing with now.

These issues are the fault of the executives running the company…

Not the employees they’re threatening to fire.

And certainly not the American Public who will be on the hook for this loan the company is begging for.  The past loan it already got.  And the potential full bail out it will need in the future.

These issues are 100% the fault of the executives who penned this letter and their executive leadership colleagues.

But now they’re begging for a bail out and if they don’t get it, they’re going to fire 19,000 employees.

I want to invest in companies where I can trust executives and managers have the best interests of the entire company and its shareholders at heart… Not just their own self-interest.

This blaming of issues they created on others isn’t just a bad look.

It’s a gigantic red flag that they’re just looking to cover their own butts instead of doing what’s best for the entire company…  They could have largely solved this issue long ago for example by not having so much debt.

In the original article I wrote about American Airlines that’s linked above I showed you 3 Reasons To Avoid Its Stock…

And while they’re all still important.

They’re not as important as this issue today.

Because this issue today shows they’re looking out for themselves more than the entire company, its employees, and its shareholders.

And you should never invest in a company that cares more about themselves than the company and its shareholders.

For the 3 reasons in the previous article and the one today of management and executives essentially begging and threatening that if they don’t get what they want they’re going to fire 19,000 people you need to continue avoiding American Airlines.

To learn more reasons why you should avoid industries related to tourism use the following links.

Click the links below to see other stocks we recommend helping Depression Proof Your Portfolio.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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