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Does American Airlines’ High Debt Put It at a Disadvantage?

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High debt

For American Airlines (AAL), 2015 was about solving integration issues associated with the US Airways merger. Thus, when most airlines were using their savings from the fuel cost fall to reduce their debts, AAL paid little attention to debt.

Though its debt has risen, AAL’s EBITDA has seen tremendous growth in the last two years. As a result, its debt-to-EBITDA ratio fell from 3.06x at the end of 1Q15 to 2.73x at the end of 1Q16. Its net debt-to-EBITDA ratio did, however, rise to 1.86x at the end of 1Q16 compared to 1.6x at the end of 1Q15. This was the highest among its peers.

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At the end of 1Q16, Delta Air Lines (DAL) had a net debt-to-EBITDA ratio of 1.1x, United Continental (UAL) had a ratio of 1.1x, and Alaska Air Group (ALK) had a ratio of -0.55x. Southwest Airlines’ (LUV) ratio was -0.05x, JetBlue Airways’ (JBLU) was 0.3x, Spirit Airlines’ (SAVE) was -0.33x, and Allegiant Travel’s was 0.64x.

Cash flows

However, AAL does have enough cash on its balance sheet to help reduce its debt significantly. At the end of 1Q16, American Airlines had ~$6.9 billion in cash and investments on its balance sheet compared to total debt of ~$21.7 billion.

Future plans

Now that AAL has completed its integration process, it plans to divert its attention to its high debt levels and bring them down over time, although a clear-cut plan isn’t yet available. This will be an important factor to watch for in the company’s upcoming earnings call.

It’s important for investors to track AAL’s leverage, especially given that AAL only came out from bankruptcy in 2013. In 2011, former company AMR Corporation filed for bankruptcy while trying to restructure its high debt.

On the other hand, if AAL does manage to reduce its leverage significantly, it could be in a much better position to weather the next industrial downturn, whenever that happens.

The PowerShares Dynamic Market ETF (PWC) invests ~1.8% of its portfolio in American Airlines.

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