After months of lockdowns and journey bans, the nation’s largest air provider American Airways (NASDAQ:AAL) remains to be recouping its losses after a few of its worst months. AAL stock has misplaced greater than 14% of its value because the airline racked up billions of {dollars} in debt over the past three months, an quantity that’s anticipated to hit $38.5 billion by subsequent week’s second quarter finish.
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In an effort to enhance its liquidity and keep afloat, the corporate plans to lift $3.5 billion in financing via the sale of securities. Whereas the resurgence of the journey trade in the usand the additional financing can do wonders for American Airways stock, analysts nonetheless advocate that you simply stay bearish on this title.
Even Earlier than Pandemic, Issues Weren’t Nice
Previous to the novel coronavirus swept throughout the globe, issues weren’t smooth-sailing for American Airways. The corporate was ridden with a high-interest expense and debt that was a drag on its income numbers. In 2019, AAL generated $47.5 billion in income and had an working expense of $42 billion. Nonetheless, an extra $1 billion curiosity expense diminished the working margin to simply 5%.
The state of affairs worsened when reactions to the pandemic saved flights grounded, additional including to American’s monetary burdens. With little to no journey exercise and rising debt ranges, the AAL stock misplaced greater than 50% of its value year-to-date. As of this writing, the stock price is $13.17.
Within the wake of the turmoil, AAL introduced that it will restrict its each day cash burn fee to $40 million a day. The cash place could be aided by the $5.eight billion in monetary support that the corporate acquired as a part of the CARES Act and an anticipated $4.75 billion loan from the Treasury Division. If this goes via, AAL is predicted to have $11 billion in cash reserves by the month.
By way of elevated funding, the airline plans to convey its cash bills to zero by the tip of the yr however with a second wave of the pandemic on the horizon, solely time will inform if this objective is attainable. Till then, the corporate can work on paying off the $34 billion debt (as of the primary quarter) on its books.
The reply to American Airways’ burgeoning issues lies in elevating new capital and that is precisely what the corporate got down to do.
Enhancing Liquidity
To climate the damaging results of the pandemic, American Airways on June 22 introduced that it will elevate $3.5 billion in financing. This may be performed by promoting $1.5 billion in shares and convertible senior notes due in 2025 and $1.5 billion in senior secured notes due in 2024. Along with this, AAL may even enter a brand new time period loan facility for $500 million due in 2024.
Following the announcement to lift $3.5 billion in funding on June 22, AAL modified its preliminary providing of $750 million shares and $750 million convertible senior to $1 billion every. The proceeds from the sale amounted to $1.94 billion which might enable AAL to “enhance its liquidity position.” On condition that the corporate plans to lift a complete of $3.5 billion, buyers can count on extra safety gross sales within the close to future.
To make certain, the providing places strain on the short-term value of American Airways stock, nevertheless, the long-term prospects present larger upside potential. The corporate can decrease its debt ranges and preserve cash bleeds to a minimal. It will probably additionally shutdown talks of Chapter 11 submitting and permit AAL to carry its floor within the in any other case unstable airline trade.
Nonetheless, the brand new funding comes at a value. American Airways’ providing price was solely $13.50, 9.6% decrease than Monday’s closing price. This raises considerations as a result of whereas buyers are keen to place their cash in AAL stock, they’ll solely achieve this at an extremely backed price. Along with this, the brand new providing is more likely to dilute current shareholders’ curiosity within the firm.
Backside Line on AAL Stock
AAL stock is mired within the results of the coronavirus because the airline trade tries to recoup losses from the previous couple of months. Though journey in the usis beginning to decide up, analysts predict that it’ll take as much as three years for the trade to return to a standard degree of operation. That’s, assuming {that a} second wave of the pandemic doesn’t decimate the airline trade earlier than that.
Whereas the capital raised by AAL (albeit at a reduced price) is a promising signal, it’s worth remaining bearish on American Airways stock till the corporate produces some tangible outcomes. The provider’s excessive debt ranges and curiosity expense are nonetheless a matter of concern and are more likely to be a drag on the corporate’s income for at the least a few years.
Divya Premkumar has a finance diploma from the College of Houston, Texas. She is a monetary author and analyst who has written tales on numerous monetary subjects from investing to non-public finance. Divya has been writing for Investor Place since 2020. As of this writing, Divya Premkumar didn’t personal any of the aforementioned stocks.
