Why Did American Airlines Carry Out SPO?

Why Did American Airlines Carry Out SPO?

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The pandemics keep influencing business. It is becoming harder to seek more help from the US government, and companies have to look for alternative ways of sustaining their lives. At the beginning of November, it became know that American Airlines (NASDAQ: AAL) was carrying out an SPO. In this article, we will find out what it means and how it might influence the stock price.

American Airlines successfully sells 38.5 million stocks

By now, American Airlines has already sold 38.5 million stocks. Sales went on from November 10th through November 12th. The average stock price amounted to 12.35 USD. This means, American Airlines managed to attract 480 million USD. The company plans to spend the profit on its corporate goals and enhancing its credit capacity. The number of stocks in the exchange reached 560 million papers.

SPO dilutes the shareholders’ shares in the company and increases the number of stocks traded in the exchange, which investors take negatively because their share in the company decreases. As a result, on November 10th (when it became known about the SPO), the stock price dropped by almost 10%.

What did American Airlines need the SPO for?

The pandemics increased the debt load on American Airlines dramatically. While in the first quarter of 2020 its long-term debt was 21.5 billion USD, at the end of the third quarter it reached 30 billion USD, growing by 40%. All the liabilities of the company grew to 68.3 billion USD, which is 8 billion USD more than at the beginning of the year.

The presidential elections in the USA make the second round of financial help to companies less relevant but the debts had gone nowhere. A company can sell bonds, however, this only increases the debt load. That is why an SPO looks like an optimum solution for American Airlines because it allows the company to attract funds but not increase the debt load.

Decreasing expenses

To stabilize the financial situation, the management of the company has to resign itself to a significant decrease in expenses.

The company sent over 150 planes to temporary storage. Also, the company amended the agreement with Boeing (NYSE: BA), so that the latter will supply 18 pieces of Boeing 737 MAX 8 in 2023 and 2024 (which is a negative event for Boeing).

When the federal program of compensating salaries came to its end on October 1st, American Airlines kept giving sacks to its personnel. In October, it fired 19,000 more of its employees.

This way it took the company three months to decrease its expenses from 58 million USD a day to 44 million USD a day; in the fourth quarter, American Airlines plans to drop its expenses to 30 million USD.

The consequences of decreasing expenses

Taking a large part of airplanes out of the park and firing employees will inevitably cause a decrease in future income because fewer airplanes generate less profit. This, in its turn, will harm the maintenance of the debt that has increased so much this year. In such a situation, we cannot count on dividend payments.

However, for the company, it is much easier to take already existing airplanes out of storage facilities and hire new employees in already existing workplaces than buy new planes and develop the infrastructure for their maintenance. That is why the company puts most of its hopes in the restoring of passenger flow.

Anyway, there are positive sides to the decrease in the expenses. 8.7 billion USD of free money and a drop in its spending to 30 million USD a day will allow the company to live through a long decay of air transportation.

When will passenger flow restore?

The revenue of American Airlines is becoming to recover, compared to the previous quarter. In the third quarter of 2020, the company managed to make 3.17 billion USD of revenue, which is 95% more than in the second quarter. This means the passenger flow is restoring slowly.

Why do I say “slowly” if the increase was by 95%?

The point is the growth of the number of cargo flights and the decrease in the expenses we have just discussed. The revenue in the cargo segment has almost reached pre-crisis levels, amounting to 207 million USD. Add to them 1.26 billion USD received by decreasing expenses from 58 to 44 million USD a day.

In the second quarter, the return was 1.62 billion USD. Add to them 1.26 saved billion USD and 207 million USD of cargo money. We get 3 billion USD. The overall revenue in the third quarter was 3.17 billion USD. As you see, the real growth of the revenue is very modest.

The slow speed of recovery can be highlighted by the grave forecasts of the company management at a press conference, devoted to the revenue of the company.

American Airlines expects passenger transportation on inner directions to reach 50% of the volume of 2019. As for international flights, the situation is even more pitiful: the passenger flow will only reach 25% of the levels of 2019. On the other hand, we can say that there is plenty of room for growth.

Airlines animated

There is a factor that may lead to significant growth of the stock price even if passenger flow will go on restoring so slowly.

After the presidential elections in the USA, Pfizer (NYSE: PFE) decided to announce that the vaccine the company is now working on was 90% effective. The news was mostly political, aimed to support Biden; however, the stock price of airlines sky-rocketed.

The stock price of American Airlines at that moment leaped up by 20%. This is the way investors will react to each piece of news about the vaccine in the future.

The next stage will be the vaccine going on sale. Then the start of vaccinating, etc. Naturally, people will expect quicker growth of passenger flow; however, investors will try to go ahead and buy stocks in advance.

Negative events accounted for in the price

Currently, the stocks of American Airlines are trading for 12 USD each. The low of this year was 8.25 USD. The current price, so to say, accounts for all the negative events known at the moment. The situation may worsen only if something bad happens again.

The SPO put additional pressure on the stock price. According to the statistics, when a company carries out an SPO, the stocks head for the planned sales level. American Airlines planned to sell the stocks per 12.5 USD each, which was almost the market price on the day when it became known about the SPO.

Naturally, after so many stocks were sold, they dropped in price, but this was the only negative influence of the SPO, and the price did not reach this year’s low. Hence, at these levels, we can consider long-term investments in American Airlines.

Risks

The only thing that worries is the impressive number of short positions in the stocks of the company. This is called Short Float, and the index is now 31.4%. However, nothing is surprising to it: out of the 4 largest US airlines, American Airlines has the largest debt load, which makes investments in this company somewhat risky.

Thus, the main risks of investments in this company are a hard debt load and slow restoration of passenger flow.

American Airlines stock tech analysis

The stocks of the company are trading under the 200-days Moving Average, which means there is a downtrend. However, the stocks have been trading in a range since July. The upper border of the range is 14 USD, the lower one is 11 USD.

American Airlines stock tech analysis

Hence, the optimum price for buying the stocks is the support level of 11 USD. The border of the range reaches 27%, and if the stocks go on trading in the range, the return on stock, if buying at 11 USD, will be tangible.

Positive news about the vaccine may cause the price to break away 14 USD and start growing. For long-term investment, any price between 11 and 14 USD will be suitable.

Summary

SPO helps to attract finance to the company leaving the debt load as it is. Companies often use this tool to solve their current problems. For example, Tesla has done this many times, and its stock price keeps growing.

American Airlines got an opportunity to save its own money and wait for passenger flow to come back to the pre-crisis level.

We must also add that after all the stocks were sold, the stock price did not drop significantly. The most important thing is that the stocks were bought by investors, hence, some are ready to risk and invest in American Airlines.

However, remember the debt load and try not to be too emotional about investing in the company.

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