I usually post these once a week, but I had some extra time today and my sleep schedule’s screwed so I thought I’d go ahead and write up another DDDD (data-driven DD) about another position that I’ve been holding for a while – AAL death puts.
Disclaimer – This is not financial advice, and a lot of the content below is my personal opinion. In fact, the numbers, facts, or explanations presented below could be wrong and be made up. Don’t buy random options because some person on the internet says so; look at what happened to all the SPY 220p 4/17 bag holders. Do your own research and come to your own conclusions on what you should do with your own money, and how levered you want to be based on your personal risk tolerance.
Everybody knows airlines are screwed. You know it’s bad when perma-bull Warren Buffet sells ALL their airline stocks. AAL is especially screwed, and their stock price, down 70% from Feb, reflects this. Even being down so much, Warren Buffet STILL sold. So how much worse can this be? Let’s look at their Q1 numbers and forward guidance. Here’s their 10-Q if you want to follow along.
Q1 Income Statement
| Revenue | $8.5B |
|---|---|
| Op. Expenses | $11B (1.4B fuel, 3.1B salaries, 630M maintenance, others not important) |
| Non-operating Expenses | $341M (257M net interest expense, others not important) |
| Net loss | $2.2B |
| Q1 EPS | -$5.26 |
Balance Sheet
| Total Assets | $58B (7.1B current, 34B equipment, 8.6B lease rights, others not important) |
|---|---|
| Total Liabilities | $61B (19B current, 22B long term, 6B pensions, others not important) |
| Book Value (Equity) | -$2.6B |
Ok wait hold up. It has a negative book value? That’s already a red flag. In fact it was pretty poorly financially positioned even before COVID-19 with a book value of -$118M in Dec 2019, and this was when things were booming. Their -$5.26 EPS for 1Q annualized to -$21.04 with a current stock price of $9.11 gives them a PE ratio of -0.4. This is with Q1 being strong up until March. Imagine how bad Q2 is going to be. Also, their book value of -$-2.6B and have a market cap of $3.9B. Valuations make absolutely no sense when a company has negative book value, and they should theoretically already be bankrupt by now, but I could tell you that there’s no way that this company is worth anywhere close to $3.9B, especially with bleak prospects for airlines in the next few years. This is why Warren Buffet sold all his airlines at a massive loss. Even if they don’t go bankrupt (which they probably will soon), they’ll be spending all their earnings for the next decade recovering their book value from this quarter alone.
Liquidity and Debt
| Total Long Term Debt | 24.7B (23.4B secured, 1.3B unsecured) |
|---|---|
| Available Revolving Debt (as of March 2020) | 3.2B |
| Cash + Marketable Securities | 3.6B |
| Max. Loans from U.S. Government Payroll Support Program | 5.8B |
| Available Liquidity in Q2 | 12.6B |
In their 10Q, it was mentioned that they had a cash burn rate of $70M / day. Using that we can predict what their available liquidity would look like at the end of Q2.
End of Q2 Available Liquidity = 12.6B – ($70M * 92 days) = 6.2B
They also mentioned that they will be trying to reduce their cash burn to $50M / day by June. One of their covenants for long term bonds that they’ve issued is that they must maintain at least $2B in liquidity, With that rate let’s see how long it will take for them to break that.
Days until problems = (6.2B – 2B) / 50M = 84 days
They’re literally already deep into insolvency territory. Noone is going to lend them money when they run out of liquidity; they’ve even talked about this as one of their risk factors in their 10Q. The government already approved a bailout for airlines and it’s highly unlikely they’re going to get a second bailout. Assuming that air travel isn’t going to miraculously recover by September (which everyone with a brain will agree it won’t), and they meet their targets for cost reduction despite the requirement that they do not furlough nor reduce salaries until the end of Q3, they will have run out of cash by then. What’s next? Let’s look at what their Q2 book value would look like.
Book Value = -2.6B (Q1 Book Value) + 5.8B (government bailout loan) – 6.4B (Q2 cash burn) – 3.2B (Revolving debt that they’re likely to have drawn down during Q2 and accounted for in cash burn) – 1.7B (government promissory note maturing 2030) = -8.1B
Again their market cap is 3.8B. This is absolutely screwed. Maybe they’ll find other ways to delay the inevitable, but their immense amount of cash burn is only going to delay the inevitable by a short while. $AAL is heading to bankruptcy. From the fact that their book value by that time is going to be extremely negative, this will probably be a Chapter 7 bankruptcy, which means existing equity holders will get absolutely nothing.
TLDR; AAL 2p 1/15/2021
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.