American Airlines, Inc., founded in 1934, is the primary subsidiary of AMR Corporation. The company provides aircraft services to around 160 destinations globally. It has partnerships with three regional carriers: American Eagle and Executive Airlines (both owned by AMR) and Republic Airways Holdings (owned by a non-AMR affiliated third party). These regional carriers play a crucial role in linking major hubs to smaller regional airports without international service.
The main airports for American Airlines include Dallas/Fort Worth, Chicago O’Hare, New York City (JFK), Miami, and Los Angeles.
A new business strategy called FlightPlan 2020 was introduced by American Airlines in 2009 to ensure profitability in the next decade. This plan helps prioritize goals and strategize for the future.
A joint business agreement (JBA) was formed by American Airlines with British Airways, Iberia, Finnair, Royal Jordanian, and JAL between 2008 and 2010.
In order to enter into a Joint Business Agreement (JBA), American applied and was granted permission for antitrust immunity. The purposes of entering a JBA include expanding their route network through codesharing, sharing revenues and costs, and boosting commercial cooperation. In late 2011, AMR filed for Chapter 11 bankruptcy protection to reorganize its business. American’s parent company aims to reduce debt and mounting costs by restructuring the company. Despite the parent company’s bankruptcy filing, American announced that it will continue its normal operations, at least for the foreseeable future.
Company Strengths American has three key strengths: inclusion in an airline alliance, an extensive air cargo network, and a notable presence in the Latin American market. American is a member of Oneworld, an airline alliance that enhances its route network through code sharing, provides opportunities for passengers to earn frequent flyer miles by flying with other alliance airlines, and improves operational efficiency.
American has a significant air freight operation, which serves cities in the United States, Europe, Canada, Mexico, Latin America, and Asia. Cargo services accounted for approximately 3% of operating revenues in 2010. The substantial revenue growth of 16.3% that year was primarily driven by increased demand in the Pacific and Latin American regions. In addition to its extensive cargo operations in these areas, American has established a strong presence in Latin America due to higher passenger revenue.
In 2010, the Latin America market had the highest passenger revenue per available seat mile (RASM) at 11.80 compared to other regions. American Airlines views Latin America as a robust region because of its established routes and limited competition from other airlines. Nonetheless, American also confronts risks including high labor costs, escalating fuel prices, and a global recession. In contrast to other airlines, American incurs relatively higher labor expenses for its employees.
Labor costs accounted for 28% of American’s operating expenses in 2010, posing a hindrance to its competitiveness against low labor cost airlines. Additionally, the steady increase in fuel prices and the unpredictable availability of fuels present another significant risk factor to American. While there have been attempts to mitigate this risk through fuel hedging with derivative contracts, these contracts do not guarantee any specific level of protection against fuel cost increases.
America is currently grappling with a significant issue caused by the high costs of fuel resulting from their utilization of older and less efficient aircraft. These costly and uncertain fuel prices are greatly affecting the financial state of the company, which has already been weakened by the worldwide recession. The decreased demand for air travel and reduced returns on investments have led to substantial losses. Consequently, American is presently encountering difficulties in ensuring sufficient liquidity and decreasing debts amidst this global economic downturn.
Among the risk factors that America faces are disasters, accidents, and terrorist attacks. Because of its weakened financial condition, if any of these risk factors were to occur, America would be highly likely to collapse and declare bankruptcy.
The financial leverage percentage remains positive throughout all three years, indicating that the company’s rate of return on assets surpasses the interest rate on its debt. However, American’s financial leverage percentage has significantly dropped by 65% from 2009 to 2010 due to a significant decrease in its return on assets. The EPS, quality of income (measuring the proportion of income in cash), and profit margin (indicating the profit earned from each sales dollar) have all displayed negativity for three consecutive years. Thus, it is evident that the company is experiencing financial losses.
An analysis of American Airlines’s profitability shows that it effectively uses assets to generate revenue. Both the fixed asset turnover ratio and asset turnover ratio have remained stable. However, this stability suggests that the company’s earnings per share (EPS) must have been negative, as share prices cannot be negative. Therefore, the main conclusion is that the company has been experiencing losses per share of its stock. According to its policy, American Airlines does not pay dividends, making the dividend yield ratio irrelevant for the company. The quick ratio of American is a concern since it falls below 1, indicating insufficient quick assets to cover current liabilities. On a positive note, there has been gradual improvement in the company’s ability to collect cash with a decrease of approximately 2 days in cash collection from customers between 2009 and 2010, resulting in an increase in the receivables turnover ratio.
Despite having a cash ratio below 0.02 for three consecutive years, American does not have enough cash reserves to handle its short-term obligations. Additionally, the company cannot generate enough income to cover its interest payments. The debt-to-equity ratio, which measures the company’s reliance on debt versus equity for operations, has been negative for three years in a row. This indicates poor performance over the past three years as the denominator (equity) has become negative.
Despite the positive cash coverage ratio of American and its ability to pay back obligations with cash, the company will face difficulties in repaying its interest due to insufficient earnings. Based on this analysis, I advise against purchasing the stock of this company. Additionally, low current and quick ratios indicate a lack of liquidity, while a negative TIE ratio reflects low solvency. Moreover, negative ROA and profit margin ratios imply that investors are experiencing losses on their investment.
American Airlines is currently experiencing challenges in its low liquidity, solvency, and profitability. The airline is encountering difficulties in generating profits and repaying debts. Airlines have the choice to declare Chapter 11 bankruptcy protection, which can lead to cost reductions and increased competitiveness. Past instances have demonstrated that this approach can improve operations. However, it is crucial to acknowledge that American Airlines will need to undergo restructuring amid tough economic conditions caused by a prolonged global economic slowdown. Considering the unfavorable prospects for American Airlines in both the near-term and long-term, it would be wise for investors to refrain from investing in the company.
