28 BARRON’S March 16, 2020
investment-grade balance sheet, and
that should serve it well during this
health and economic crisis.
The airline has structural advan-
tages in its favor. It dominates its ma-
jor hubs, which include Atlanta and
Salt Lake City, and that has helped it
earn the highest profit margin of leg-
acy airlines in recent years. Its credit-
card partnership withAmerican Ex-
press(AXP) is also highly profitable,
and produces recurring cash flows
that are largely uncorrelated to its
core business—though spending
would decline if the economy slows.
Delta’s dividend could also be sus-
pended, which would save it about $1
billion annually.
Delta has other options, though.
It’s reducing capacity, and using this
moment to retire older jets it had
been looking to take out of service. It
has also initiated a hiring freeze. The
company is targeting $4 billion in
cost reductions this year, plus over $3
billion in free-cash-flow savings from
deferred capital expenditures, volun-
tary pension funding, and the sus-
pension of sharebuybacks.
While Delta withdrew guidance
for 2020, the airline expects to have
at least $5 billion of liquidity by the
end of the quarter, with about $20
billion in unencumbered assets that
can be tapped later on. It has more
debt than Southwest—some $17 bil-
lion, giving it a total debt-to-Ebitda
ratio of 1.9—but it’s still manageable.
At a recent conference, CEO Ed
Bastian said that Delta is seeing as
much as a 30% decline in bookings,
and he’s prepared for worse. But he
expects the company to remain free-
cash-flow positive, and plans to
maintain its investment-grade credit
rating. “We expect demand erosion
will continue in the near term,” he
said, yet the airline has “built a plan
that prioritizes free-cash-flow genera-
tion and preserves liquidity.”
United Airlines Holdings (UAL)
Financial Flexibility Score: 20,
Third Among Large Carriers
United’s incoming CEO J. Scott
Kirby has expressed a credible worst-
case scenario, and the company is
actively taking aggressive measures
to prepare for it. That includes reduc-
ing capacity, cutting discretionary
operating expenses, slashing its 2020
planned capital expenditures in half,
and suspending its share-repurchase
program. That’s a lot of savings to go
with United’s $8 billion of available
liquidity and $20 billion in unencum-
bered assets to borrow against. It
should have enough operating cash to
remain above the $3 billion liquidity
level that the airline needs to keep
operating.
The challenge for United is that
much of its revenue and profit comes
from international routes, and
United’s debt load remains relatively
high, at 2.7 times Ebitda, with $20.5
billion in total debt. Its international
exposure has hammered the stock,
making it one of the worst perform-
ers this year, down 53%. Margin-im-
provement plans and other turn-
around initiatives will have to wait
until the pandemic recedes. Short of a
lengthy recession, United has the
balance sheet to withstand the shock.
Spirit Airlines (SAVE)
Financial Flexibility Score: 19
Ultralow-cost carrier Spirit appears
most imperiled by the crisis. The stock
is down 63% this year, and trades at
just 3.4 times earnings. However, its
debt/Ebitda is high, at 4.3 times. The
airline has always operated with a lean
cost structure, which could help it
absorb an extended period of lower
Delta is
seeing as
much as a
30% decline
in bookings,
and its CEO
expects it to
get worse.
CRISIS PLAYBOOK
Airports are ghost towns,
thanks to global travel
restrictions.
fares. Profits, of course, are part of any
company’s ability to weather storms.
“[Spirit Airlines] is one of the only
airlines to cut pricing on flights and
still be profitable,” writes J.P. Morgan
analyst Jamie Baker in a recent re-
search report. “Management’s view is
that [Spirit] will navigate the
Covid-19 situation adequately, and
that a fundamental change in land-
scape is not likely at this point.”
Baker gives management the benefit
of the doubt, rating shares the equiv-
alent of Buy with a $53 price target.
But its pitch of ultralow fares may
not resonate in a market where ev-
eryone is afraid to fly, no matter the
cost. And price-sensitive leisure trav-
elers may not return soon if the econ-
omy goes into a tailspin. We’d watch
and wait.
American Airlines Group(AAL)
Financial Flexibility Score: 12
Of the big three airlines, American
has the least flexibility. It holds $33.4
billion in debt, giving it a long-term
debt/Ebitda ratio of 4.8 times, well
above its peers’ leverage. Some of its
unsecured debt yields close to double
digits, higher than the 5% for Delta,
and the 8% for United. With a market
cap of $6 billion, its equity value is
just 17% of enterprise value, putting
it closest to the 10% level that would
signal “distress.”
That puts the greatest pressure on
maintaining cash flow. But American
also has $7.3 billion in cash and other
liquidity, and it has $10 billion in
unencumbered assets that it can bor-
row against should it need to raise
cash. American also has a buffer on
that debt load: its closest major matu-
rity of $750 million isn’t due until
- Its debt covenants require
American to maintain $2.5 billion in
liquidity.
Tighter profit margins and a risk-
ier balance sheet already had Ameri-
can shares trading at a discount to
other airlines, even before coronavi-
rus appeared. Though perhaps the
riskiest play of the group, it could
also have the most potential for up-
side if the coronavirus turns out to be
a shorter-term, perhaps six-month,
economic interruption.B Spencer Platt/Getty Images