Should We Brace Ourselves for American Airlines' 1Q16 Earnings?
American Airlines leads the industry in debt
Airlines are have seen unprecedented profitability during the past two years, thanks to the drastic fall in crude prices. At this time of record profitability for airlines, most airlines have tried to strengthen their balance sheets by reducing debt. However, American Airlines Group (AAL) has paid little attention to its debt because it’s been busy solving integration issues associated with the US Airways merger.
Although AAL’s debt has increased, its EBITDA (earnings before interest, taxes, depreciation, and amortization) has seen tremendous growth in the past two years. As a result, AAL’s debt-to-EBITDA ratio dropped from 3.06x at the start of 2015 to just 2.66x at the end of 2015. Its net debt-to-EBITDA ratio has remained constant, however, at 1.86x.
This is the highest among peers. At the end of 2015, United Continental Holdings (UAL) has a net debt-to-EBITDA ratio of 0.93x, whereas Alaska Air Group (ALK) has a ratio of -0.4x. Southwest Airlines’ (LUV) ratio is 0.09x, and JetBlue Airways’ (JBLU) is 0.62x. Spirit Airlines (SAVE) comes in at -0.27x. Allegiant Travel’s ratio is 0.66x.
Cash flow
AAL does have enough cash on its balance sheet to help it reduce its debt significantly. At the end of 2015, American Airlines had ~$6.3 billion in cash and investments on its balance sheet, compared to a total debt of ~$20.8 billion.
Future plans
Now that AAL has completed its integration process, management plans to divert attention to the high debt levels and bring it down over time, although a clear cut plan is not yet available. This should be one of the important things to watch out for in the company’s upcoming earnings call.
It’s important for investors to track AAL’s leverage, as well, especially since AAL has only recently (late 2013) come out of bankruptcy. (In 2011, former company AMR Corporation filed for bankruptcy while trying to restructure its high debt.) On the other hand, if AAL does manage to reduce leverage significantly, it would put AAL in a much better position to weather the next industrial downturn, whenever that happens.
Notably, American Airlines (AAL) makes up ~2.7% of the PowerShares Dynamic Market ETF (PWC).
Keep reading for a discussion of AAL’s dividends.
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