No-moat-rated American Airlines (AAL) reported a difficult first quarter as the COVID-19 pandemic has ground air traffic to a near-halt. We had previously priced in a very difficult 2020 and we are maintaining our $15.70 fair value estimate. Revenue declined by roughly 20% year-over year and the firm generated a net loss of $5.26 per share. Managements’ priorities are raising and conserving cash. On raising cash, the firm received $10.6 billion of funding from the CARES act and the firm is looking at its estimated $10 billion of unencumbered assets for incremental liquidity. We respect the need for the firm to raise capital to survive in an unprecedentedly challenging operating environment, but we expect that additional debt capital from 2020 will leave the firm with a sizable pile of debt for the foreseeable future. On conserving cash, the firm is working to conserve cash by reducing the daily cash burn from an expected average of $70 million a day to roughly $50 million a day.
We’re expecting 2020 revenue to decline by over 50% due to substantially reduced demand, and since a substantial portion of the firm’s cost base is fixed, we are anticipating a 2020 operating loss of over $5.5 billion. While it’s difficult to say with any certainty when air traffic will return, we are confident that demand will eventually bounce back. We’re modeling demand beginning to normalize in 2021 and that the firm will reach 2019 capacity levels once again in 2022. We think the primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums. American Airlines came into this crisis with considerably higher leverage than competitors, and we’re anticipating that the firm will need to take on even more debt to continue operations. As debt accounts for much of American’s enterprise value, we caution investors that small changes to our assumptions can lead to considerable changes in the firm’s equity value.
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