Debt continues to rise
American Airlines’ (AAL) already-high debt continues to rise. Its total debt has increased from $20.8 billion at the end of 2015 to $24.3 billion at the end of 2016 and $24.9 billion at the end of 1Q17.
Consequently, its leverage has also been on the rise. AAL’s net debt-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] ratio increased to 14.8x at the end of 2Q17. This ratio compares to its 11.4x leverage at the end of 2016 and 5.4x leverage at the end of 2015. This ratio is the highest among its major peers.
At the end of 2Q17, United Continental (UAL) had a leverage ratio of 4.3x, Spirit Airlines (SAVE) had a leverage ratio of 1.8x, and Alaska Air Group (ALK) had a leverage ratio of 1.7x. Southwest Airlines’ (LUV) cash reserves exceeded its debt.
At the end of 2Q17, American Airlines had ~$6.9 billion of cash on its balance sheet. Its free cash generated in 1H17 stood at $744.0 million.
This is a huge improvement in comparison to 2016 when AAL’s free cash flow for the entire year stood at $793.0 billion.
At present, American Airlines seems fully capable of servicing its debt. Its interest coverage ratio stood at 6.6x at the end of 2Q17. In the cyclical airline industry, investors should keep an eye on leverage.
Investors can gain exposure to American Airlines by investing in the First Trust NASDAQ-100 Ex-Technology Sector Index ETF (QQXT), which invests 1.7% of its portfolio in AAL. Continue to the next article to read about AAL’s dividend payout.