- American Airlines is soaring on news that the company as received a multi-billion dollar bailout from the Trump administration.
- This is corporate welfare. The government should let poorly run companies to fail to allow better companies to take their place.
- Even with the bailout, American Airlines makes a poor investment because of its high debt levels, low margins, and poor customer reviews.
American Airlines (NASDAQ: AAL) led the market downwards as the coronavirus pandemic put its business in existential danger.
But now, the battered airline stock is recovering as the government approves a $5.8 billion bailout package in the form of direct grants and low-interest rate loans. But American Airlines is still a troubled company despite the bailout. It has staggeringly high levels of debt, routinely mistreats its customers, and has profit margins far below the other domestic carriers.
The United States government shouldn’t subsidize failure by propping up this bloated and mismanaged company. The country will lose its competitive edge if it continues to use taxpayer dollars to support poorly run, non-competitive corporations at the expense of nimble competitors that should have the opportunity to take their place.
American Airline’s Stock is Bouncing Back from the Coronavirus
Airlines are among the hardest-hit industries from the Wuhan coronavirus pandemic that has now infected almost 2 million people around the globe. The State Department has issued a global health advisory urging Americans to avoid all international travel. And Trump has banned flights from China and Europe.
Although some speculate that the coronavirus pandemic will send American Airlines into its second bankruptcy, the market is getting more confident in the airline’s ability to survive in these turbulent times. American Airlines’ stock has risen around 31% from its 52-week low of $9.09 to close at $11.95 on Monday. News of the bailout has already sent the stock soaring by double-digits in after-hours trading.
Details of the Bailout
The U.S Department of Treasury has approved $5.8 billion in financial assistance for American Airlines from the so-called “Payroll Support Program.” The deal will include a $4.1 billion cash grant and a low-interest loan of $1.7 billion. Separately, American airlines will apply for another $4.75 billion loan from the treasury.
According to the press release, this stimulus is intended to help the airline industry support employee salaries and benefits. In reality, it’s just a form of corporate welfare.
That money could have gone directly to laid-off workers in the form of stimulus checks or unemployment benefits. And who is to say American Airlines won’t simply lay off the workers as soon layoff prohibition period is over in September.
To be fair, American Airlines pays a lot to its workforce. Salaries, wages, and benefits totaled $12.6 billion in 2019. But the company also returns a lot of value to shareholders in the form of dividends and buybacks, which totaled $1.3 billion in the same period. In total, this stimulus is worth more than American Airlines’ entire market value, which closed at just under $5 billion on Monday. And the government should have massively diluted shareholders instead of giving them, essentially, free money.
Treasury Secretary Steve Mnuchin has indicated that it will be taking some equity in airlines receiving bailouts. But the total is minuscule. Delta has stated that it will give the government warrants for 1% of its outstanding shares. But the total for American Airlines is unconfirmed.
American Airlines is in Trouble – With or Without a Bailout
American Airlines is a lousy investment, whether or not it gets a bailout. That’s because the company has terrible financials, and underperforms its competitors on several key metrics. The debt is by far the most glaring issue.
American Airlines has a staggering $20.8 billion in long-term debt, along with an interest expense of around $1 billion annually. The additional debt from the bailout will make the company’s balance sheet look even worse going forward. The carrier also underperforms its competitors on profit margins and customer scorecards, so invest at your own risk.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.