Way too much debt for comfort

Even if demand does continue to improve at a steady pace, American Airlines will still exit 2020 with a massive — and potentially unmanageable — debt load. During the first quarter, American’s debt and lease liabilities increased from $33.4 billion to $34.1 billion. Between April and July, the company plans to access over $10 billion of government funds available under the CARES Act, including $6.4 billion of loans. It also drew $2.7 billion from its credit lines in April. These moves will boost American’s debt load to more than $40 billion. Additional financing may be necessary later this year to cover future cash burn.

American Airlines already had the most debt in the airline industry by far at the beginning of 2020. Its balance sheet woes appear even more acute now. Cash flow could remain weak for the next several years; meanwhile, American has nearly $10 billion of debt set to mature between 2021 and 2023.

While American Airlines stock has fallen more than 40% year to date, this has only reduced its market cap by around $5 billion. That’s less than the amount of cash the company will burn through in 2020, even in a best-case scenario.

Thus, American Airlines stock is valued as if its prospects have actually improved since the beginning of this year. That is most certainly not the case. For investors who are bullish about an airline recovery, better-performing peers^[6] offer more upside with less risk.

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