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Friday, April 04, 2014
American Airlines Has $10 Billion Burning a Hole in Its Pocket By Justin Bachman January 28, 2014
The new American Airlines’ (AAL) fourth-quarter results were broadly in line with the profitable holiday travel season reported by its domestic peers. One thing that’s definitely not seen at other U.S. airlines, however, is the $10.3 billion in cash American has in its coffers—about one quarter of the airline’s annual revenue.
That kind of cash reserve is partly a response to what it takes to create the world’s largest airline, forged through a merger that will be rife with enormous costs, such as replacing older MD-80 jets by 2018 and raising salaries for workers. The cash cushion also helps to gird for emergencies—especially at a company with almost $17 billion in total debt—and to weather the eventual downturn of another recession or other events that depress travel demand. Still, executives acknowledged today on a conference call that $10 billion in the bank is too much.
“Holding more cash than the company needs to hold is not a good use of our shareholders’ capital, and we understand that,” Chief Executive Officer Doug Parker said in response to an analyst’s question about American’s conspicuous money pile. “It’s early on, but we understand the point and share the view. There’s no reason to hold more cash than we need.”
Delta Air Lines (DAL), which is considered the best financial performer among the network U.S. carriers, had $2.84 billion in cash and cash equivalents as of Jan. 1, while Southwest Airlines (LUV) has about $3.1 billion. Delta has resumed paying a quarterly 6¢-per-share dividend and using cash flow to repurchase its shares, spending $201 million on those activities in the last quarter.
“How much cash is normal?” CRT Capital analyst Michael Derchin asked Parker during American’s call, pressing the effort to figure out when American may begin paying a dividend or buying back its stock. “How much do you need?”
Parker replied: “We just don’t know. Twenty to 25 percent of revenues … is too much in a world that really has been transformed. But we prefer to make sure that it really has been transformed before we say what that [cash] should be.”
On an operating basis, American had a $436 million profit, exceeding Wall Street’s forecasts; sales of $9.98 billion for the quarter also slightly topped the average of nine analysts queried by Bloomberg. Texas-based American left bankruptcy protection last month and merged with US Airways on Dec. 9, taking about $3.2 billion in charges for 2013, most of them tied to its Chapter 11 reorganization.
Later this year, the airline will begin adding more seats to its MD-80, 737-800, and 777-200 airplanes to help boost financial returns. That strategy, which requires employing a thinner aircraft seat, has been a trend across the industry as a low-cost method of increasing the revenue performance of each flight.