Boeing (NYSE: BA) CEO Dave Calhoun predicted Tuesday that a major U.S. airline will “most likely” collapse in the coming months.
Unsurprisingly, he refused to name names. But when you look at the state of the airline industry, it becomes abundantly clear who Calhoun is talking about.
It’s every retail investor’s favorite travel stock – American Airlines.
According to Calhoun, the coronavirus pandemic will reduce air travel, causing carriers to struggle for the next three to five years . But it won’t take that long for beleaguered airlines to start going belly up.
The situation will get especially dire for U.S. carriers in September – the last month that the federal government will offer payroll support to the airline industry.
That’s when at least one major carrier will “most likely” go out of business.
Said the Boeing CEO in an NBC interview:
I don’t want to get too predictive on that subject, but yes, most likely. You know, something will happen when September comes around.
It doesn’t take complicated analysis to figure out that the first major U.S. airline to go out of business will likely be the one that carries the most debt.
Having the highest cash burn rate, the lowest margins, and the largest employee and plane-related costs are the other red flags.
Taking these factors into consideration, American Airlines (NASDAQ: AAL) immediately comes to mind.
This week, CFRA Research analyst Colin Scarola didn’t beat about the bush in labeling American the most likely bankruptcy candidate :
My feeling is that American won’t survive without government support beyond what they are currently being given. Regardless of that, it will probably fail and go into bankruptcy.
American Airlines isn’t the only industry company burning through cash at an alarming rate. The damage is so widespread that Berkshire Hathaway (NYSE: BRK.A) dumped all its airline stocks at steep losses.
Legendary investor Warren Buffett didn’t mince words about the decision. He said Berkshire would not:
fund a company that we think is going to chew up money in the future.
But if airlines generally have a disquieting cash burn rate, the flames engulfing American’s balance sheet are downright terrifying.
This astronomical burn rate is the product of the exorbitant operating costs that accompany the largest fleet and employee base in the industry.
As recently as March, American had 108,411 part-time and full-time employees. Discounting FedEx, no other U.S. airline had more than 91,563 employees on its payroll.
To make matters worse, American’s profit margins were already poor before the pandemic.
In 2019, it reported a pre-tax margin of 6.3%. Competitors Delta and Southwest enjoyed margins exceeding 13% , while United reported a 9% pre-tax margin.
This should make it unsurprising that Wall Street is extraordinarily bearish on AAL stock, assigning it a consensus rating of underweight .
The most devastating recommendation on the stock came from Evercore ISI , which just lowered its AAL price target to $1.
The already-battered stock would have to drop another 90% from current levels to hit the price target. That may be why short interest in the stock is soaring, despite the fact that AAL is already down around 66% since the year started.
Boeing CEO Dave Calhoun may have refused to single out American Airlines when forecasting impending industry bankruptcies. But it’s clear as a summer sky which carrier he thinks is about to go bust.