Airline stocks rallied on Monday, as promising news about the efficacy of a COVID-19 vaccine candidate made investors more confident that the pandemic can be brought under control in 2021. American Airlines (NASDAQ:AAL) quickly filed for a secondary stock offering, seeking to capitalize on a 15% jump in its stock price on Monday.
This is a sensible move, given how weak the company’s balance sheet is. However, shareholders are suffering so much dilution that it will severely limit the long-term upside of owning American Airlines stock.
American Airlines’ share count moves higher
At the end of 2019, there were approximately 428 million shares of American Airlines stock outstanding, down from 756 million in late 2013, immediately following the US Airways merger. Indeed, American Airlines spent more than $12 billion on stock buybacks between 2014 and 2019 in a misguided attempt to prop up the stock price despite deteriorating business fundamentals.
American Airlines stock has languished in recent years despite these buybacks. Now, the company has been forced to reissue stock at much lower prices to help cover the cash it has burned in 2020.
In late June, American Airlines issued just over 85 million shares at $13.50 per share, raising $1.15 billion before expenses. This increased its share count to 509 million by midyear.
It came back for more last month, announcing an at-the-market (ATM) offering for up to $1 billion of shares in conjunction with its third-quarter earnings report. So far, it has raised just over $700 million from that program, issuing nearly 58 million shares at an average price of $12.13. That brought its share count to 567 million.
Lining up another offering
Early Tuesday morning, American Airlines announced that it planned to sell another 38.5 million shares of stock. The offering has reportedly priced at $13 per share, 1.5% below American Airlines stock’s Monday closing price but 8% above its Wednesday closing price of $12.04. This would put the gross offering proceeds right around $500 million.
Including a standard 15% overallotment option, American Airlines could issue more than 44 million shares in this offering. And while it must pause the ATM offering for a month, it’ll be allowed to resume that program on Dec. 10. Based on American Airlines stock’s recent trading price, it would issue nearly 25 million additional shares if it maxes out the ATM offering. All told, American Airlines is on track to end 2020 with up to 636 million outstanding shares — and a minimum of 605 million, up more than 40% year over year.
American Airlines entered 2020 with the weakest balance sheet of any major airline, so it doesn’t have any good alternatives to raising capital through dilutive stock sales. From the perspective of ensuring the company’s survival, every dollar raised by selling stock helps as it provides extra liquidity and reduces the need to raise debt. However, it comes at a heavy cost for existing shareholders.
Assuming the maximum share issuances under its ATM program and equity offering, American would exit 2020 with 49% more shares than it had at the beginning of the year, while raising just $2.7 billion for its trouble. For perspective, American Airlines reported average daily cash burn of $44 million last quarter, roughly $4 billion for the quarter, as a whole.
Thus, American Airlines will end the year with an even more bloated debt load than it had at the beginning of 2020. With the exception of government-subsidized loans, American had to offer double-digit coupon rates for most of its recent debt issuances. That will weigh on cash flow in the years ahead, aggravating what will likely be a slow post-pandemic recovery for the airline industry and reducing the company’s value.
Even in a bullish recovery scenario, American Airlines stock is unlikely to return to 2019 levels due to a big increase in the share count. (In addition to the share issuances described above, the company has issued warrants and convertible debt that will further dilute shareholders if the stock rises.) With plenty of downside if business recovers slowly and limited long-term upside due to a high debt load and massive shareholder dilution, American Airlines stock continues to look unattractive.