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American Finds Cash Cushion Amid Coronavirus Pandemic
American Airlines has announced that, with government aid, it has enough liquidity to survive the travel drop-off associated with the Coronavirus pandemic.
American reported its Q1 results a bit over a week ago and it revealed its current liquidity status as well as its current cash flow position. The airline ended the first quarter with over $6.8 billion in available liquidity, which includes $2 billion that it raised during that timeframe, SeekingAlpha reports.
That figure does not include government aid, which will arrive in Q2 or Q3. American expects to add an additional $10.6 billion in federal aid per the CARES Act. The Payroll Support Program will bring the airline $5.8 billion – which includes a $4.1 billion grant and a $1.7 billion loan – while the airline will bring in roughly $4.75 billion from the Loan Program.
American also has an estimated $10 billion in unencumbered assets, including $2 billion in spare aircraft parts, $5 billion in airport slots, $1.8 billion in A/R and $1.2 billion in real estate. In total, that means that the carrier has access to at least $17.4 billion worth of liquidity before transactions.
At the same time, the airline announced that it will slash spring and summer capacity and suspend financial guidance. Regardless, company CEO Doug Parker says that American is fully prepared to come out of the travel slowdown stronger than before.
“The U.S. airline industry will manage through this and American Airlines will lead the way,” Parker said Tuesday on a call to the J.P. Morgan Transportation Conference. “Our team has built an American Airlines to be able to handle situations like this.”
“Our industry is more resilient today than it has been in the past,” Parker added. “We have worked to assure that American is equipped (for) an event like this. [We have] more liquidity than any other airline in the world.”
American has recognized that preserving liquidity to lessen the blow of its remarkably low load factors is preventing the airline from breaking even on virtually any of its services.
“Our sole focus is to make sure we have sufficient liquidity,” said American CFO Derek Kerr on the carrier’s earnings call Thursday.
American also revealed its cash burn figures on the same earnings report it revealed its liquidity. It said that it paid $600 million in refunds for April, $400 million for May and $200 million for June. Those figures informed an estimate that the airline will lose about $1.2 billion on cash refunds during the entire second quarter.
However, that estimate doesn’t take into account that the TSA has reported an albeit slight rebound in bookings compared to the start of the Coronavirus crisis in March. Since American announced its $1.2 billion estimates, daily passenger traffic has nearly doubled, reaching 215,000 passengers on May 8, the highest figure since March 25. Passenger traffic was up 43,881 per day at the end of last week, a 26% growth week-over-week, likely due to the fact that some states across the United States are starting to lift shelter-in-place orders, allowing more people to travel who couldn’t just a few weeks ago.
Due to a combination of increased capacity and cost-cutting, American has been able to reduce its daily cash burn from $70 million to $50 million at the end of the first quarter. The airline is working to cut costs even further going forward, but cash burn projects do not take federal assistance into account. American’s government assistance money works out to about $22.5 million per day, so even if it doesn’t cut its cash burn further, it will end June burning $27.5 million per day before taking into account hikes in passenger numbers.
American, like all other airlines, has a few things on its side. Namely, the cost of oil has dropped drastically as a result of reduced demand due to the pandemic. American says that low fuel costs are driving a $12 billion reduction in its 2020 operating costs and capital expenditures.
At the time of writing, American is preparing to see a rebound in traffic over the coming months. Though the rebound will not come close to the levels American was operating at before the pandemic, the carrier has only reduced its June schedule by 70% compared with 80% reductions in April and May.
For now, American, like every other U.S. airline receiving federal bailouts, is not allowed to voluntarily furlough or lay off any of its workers until the end of September. Congress is reportedly working on another CARES bill similar to the one that provided airlines their current bailouts, but it is unclear if the new bill will include further bailouts for airlines if it is approved at all.
Recently, American has been operating cargo-only flights for the first time since 1984 to keep aircraft and crews in the skies. The airline has quickly set up a robust cargo flying schedule to bring in some revenue while passenger traffic is down.
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