American Air’s $1 Price Target at Evercore Implies 92% Collapse | Hacker News Reader

American Air’s $1 Price Target at Evercore Implies 92% Collapse

bloomberg.com

39 pointsboredgamer263 comments

I have no particular opinion on what the share price "should be", but apparently the analyst (MD) making this prediction is ranked here: https://www.tipranks.com/analysts/duane-pfennigwerth

I quite like this idea of ranking people based on their prior predictions! Again, no idea about any of the specific subject matter or the people covering it, but certainly an interesting site.

That's an interesting idea. I just looked at the top 25 analysts, 23/25 are specialized in the tech sector - maybe something of a "rising tide lifts all boats" effect there at the top.

These bailouts need to be punitive to investors or behavior doesn’t change. We need these bailouts to keep people employed and to maintain the infrastructure/service, but if you take a government bailout, it should be automatic chapter 11, automatic equity wipeout, and government $’s should look like DIP financing...or something like that... watch balance sheets become more conservative in industries that need a bailout every ten years

An argument can be made that you risk losing the talent to lead these companies to much more economically viable industries. I'm not sure I completely subscribe to the argument, but I think to some degree corporate welfare is as necessary as general welfare to help give a leg up to industries that are necessary but would otherwise have a harder time being successful.

Hot take, I know. That said, I do agree with your premise and think a disproportionately high government stake in a bailed out company makes a ton of sense.

IMO: transportation bailouts should be focused on essential everyday services (e.g. public transit, which is currently hemorrhaging money) and not for a mode whose purpose is to facilitate business trips and vacations

> a travel mode used for vacations and élites

Normal line workers everywhere have to travel for business and don't have any choice about it. These people aren't travelling for fun and aren't elite by any stretch of the imagination.

Let Them Use Zoom. /s

Seriously though, we’ve become extremely accustom to a mode of travel (air travel costs have deflated over the last several decades) that generates ~3% of the world’s CO2 emissions. Anything that scales that back so essential travel is the majority of air travel is a good thing.

High level, we’re forced by COVID to re-evaluate what we perceive as needs, and what actual needs are. Again, this is a good thing, and pushes back against cultural inertia (open office plans, face to face for biz travel, commuting to work when you could just as easily work from home, etc).

If you have to travel for business, the business should be paying for it, not taxpayers.

Should we make all roads toll roads as well? Or how about society works together to support basic infrastructure like roads and air routes.

Yes! Tolls are making traffic in a lot of European cities a lot more manageable, and vastly improving air quality. Correctly pricing automobile travel is the only way we can offboard our cities from the insane externalities of single-occupant vehicles (not just air pollution, but all that valuable urban real estate wasted on parking spots and roads [0]).

[0] In normal times, 80% of commuters get to Manhattan via transit. ~1,500 rail passengers enter Manhattan’s central business district every six seconds between 8–9AM.

Trying to cram all those Manhattan-bound train riders into cars (or AVs) would be impossible. You’d need 324,000 more vehicles to accommodate them, and 100 new bridges or tunnels. [1]

[1] https://nyc.streetsblog.org/2009/08/10/what-if-everyone-drov...

You're not asking to socialize the roads. You're asking to socialize the cost of the cars and the gasoline.

What is the problem with making all roads toll roads? If anything, the unseen costs of driving due to lack of tolls causes significant issues such as traffic, road wear and tear (resulting in pollution), and mid allocation of the public’s resources into infrastructure for private vehicles rather than public transportation.

Government is already reading license plates, might as well attach it to a billing system and charge people accordingly. Want to travel during high demand hours? Pay more. Watch businesses and people adjust their habits automatically to better use the shared resource.

And if the concern is that poorer people get shafted, then give them a certain amount of cash or credits for road usage.

Tolls were once difficult to enforce — collection infrastructure was expensive and slowed down traffic. Modern technology offers new ways forward, at the price of destroying privacy.

Or you could just impose a gasoline tax as a proxy for travel (oh hey that's exactly what they did.)

That works too, although if electric cars become mainstream, it would be an issue for the future.

It seems better to just tax something instead of setting up toll infrastructure

It really depends.

The free market is only efficient when transaction costs are low. For many forms of travel, the cost of monitoring such travel makes tracking far too expensive. Even just understanding a toll scheme has its own cost; you don't want to be too worried about misestimating the cost of every drive down to the grocery store.

For long-distance interstate travel, however, toll roads make a lot of sense. This is particularly the case where trucks are involved. You charge proportionally to axle weight, so the companies doing the shipping pay for the damage they are doing to the roads.

In other congested areas, tolls can serve as an effective form of rationing, particularly over bridges or through tunnels. This encourages more efficient resource usage, e.g. by making carpooling more worthwhile. This also makes more sense for city centers with congestion-charge fees. The alternative rationing scheme here, "sitting in traffic", is a very bad way to pay for things and imposes its own very high transaction costs.

A toll is a tax. Road usage isn’t equivalent, some roads are used more than others and at certain times. The goal would be to vary the tax based on demand, which is different for each road and time.

This already happens in many places, especially with tunnels and bridges.

> What is the problem with making all roads toll roads?

It's literally regressive.

Life is regressive. The only way to allocate resources efficiently is to charge what a thing costs to provide. (This often includes a modest accounting profit, consistent with the cost of capital, but never an outsized economic profit, consistent with rent seeking cronyism.)

If life is too hard for people with less money, society should decide how much money to give everyone to make it better, and then let them make their decisions -- instead of declaring, "Passenger Vehicle Traffic And Parking Lots Are Virtuous And Worth Subsidizing."

Sounds inefficient and complex to me to give people money just to take it away again. If you don't make people pay tolls you don't need to give them money to pay the tolls. Cover it all with income tax.

The problem is that when driving is free, people end up doing much more of it than is efficient. So instead of paying the congestion charge, you "pay" by sitting in traffic. Are you being responsible about resource usage and carpooling? Too bad, you still pay the exact same amount of delay. (HOV lanes do mitigate this, but only on those corridors where they're available.)

Meanwhile, the government generally ends up building too many roads and not enough transit. All this easily overwhelms the other inefficiencies.

Other bad plans where we don't charge for resources: Let's give all the people free electricity, so poor people don't have to pay something regressive! Then a few jerks can use it to mine Bitcoin until there are brownouts everywhere.

Road capacity is a limited resource. You can't just keep increasing income tax indefinitely to keep covering the ever increasing usage. The goal is to reduce usage, and/or time shift it.

So reduce taxes for poorer people. Or give them credits for tolls. The point is road usage isn't free, and pretending it is causes problems elsewhere.

having a car is a privilege, not a basic need. don't have a car? don't have to pay tolls.

norway has an interesting model which i don't agree with fully - new roads are toll roads until they pay for themselves. i guess support after that time is paid by fuel tax?

How do you get your food? Via someone transporting it in a vehicle? A vehicle on a road? Eating is not a privilege.

i've got a shop in walking distance.

someone transporting it in a vehicle is also an option which I very seldom use for groceries but almost everything else does come to my house this way.

access to shelter, food and water should be a basic human right. access to a car and it's supporting infrastructure shouldn't. consider what would have to happen to not need a car to get groceries instead of fueling the positive feedback loop of communities designed for cars and cars only. i've been to a development surrounded by a highway on all sides, you literally couldn't get out of it legally in any way which didn't involve a car. of course people jaywalked to walmart on the other side of one of the two-lane roads.

> i've got a shop in walking distance.

How do you think it gets to the shop?

No true Scotsman delivers it there.

You're not understanding my point - I'm saying the goods you buy have to travel by car to get to the stop you go to. So the road roll would increase food prices, which is a regressive thing to do.

I think the point is that most Americans get more out of roads than they do out of Air travel.

Yes, most roads should be toll roads. The benefits to society would be enormous.

Normal line workers mostly take a plane for vacation or family reasons. Specialized workers, i'll give you that, but it's way less than you imply.

Who do you think is filling the hundreds of economy seats on flights between regular cities? It isn't holiday makers, and it isn't executives. It's normal people like you and me trying to get around for work.

Without the bailout, if airlines made schedule/service decisions based purely on financial drivers, it would have been pretty bad. Lots of places might have been left with no flights.

It's possible the amounts and/or split between grants and loans wasn't right...but some kind of bailout was needed to avoid chaos.

~$29 on January 1st, 2020. A $1 target is pretty brutal. Though, for airlines, bankruptcy isn't all "bad". It invalidates their labor contracts, and allows them to renegotiate in an environment where they have a lot more leverage.

Awesome, another industry that was paying living wages will now stop doing that. Minimum wage aircraft mechanics and pilots. I guess flight attendants are already there.

According to Glassdoor, American Airlines flight attendants paid hourly average $30/hr, and $38,500 when salaried.

(Their pilots average ~$167,000 a year. The mechanics make ~$70,500. Reviews say the health insurance is pretty good, there is a modest 401(k) match, and of course you get to fly free on standby).

Please bring only meaningful in-depth critiques to HN, and leave the fact-free axe-grinding elsewhere.

"paid hourly average $30/hr"

I wouldn't make a direct comparison of that with other jobs. There are many work hours they aren't paid for, or are paid at a lower rate.

Oversimplified, but they are paid nothing or almost nothing for waiting around for late flights, security, etc. Full pay for "block hours" where the plane has pushed back, less for pre/post flight work. And lower seniority f/a folks can have a harder time getting hours at all, and they are well below average pay. Seniority is everything.

It's not a bad job considering the fairly low qualifications, but it's not really $30/hour. New flight attendants generally end the year around $20k gross. And that's at the majors.

Maybe not! However, our poster upthread said that he guessed flight attendants were already at minimum wage it would need to take literally half their time before we're even to the $15/hr level that was pitched as a "living wage" in New York City, their hub city with the most expensive cost of living. (Other AA hubs: Charlotte, Chicago, Dallas, LA, Miami, Philadelphia, Phoenix, Washington, DC/Arlington. Some of these are cheaper than others.)

This is technically correct but dishonest. These numbers are true only for American Airlines.

Every time you step on to an "American" plane that is "operated by xyz", you are not flying American Airlines. You are flying an American Eagle branded subcarrier like Republic or SkyWest. These subcarriers fly a very large percentage of "American" flights.

The pay and benefits at the subcarriers are dismal.

This is a very interesting point in the general sense, but American Airline's impending bankruptcy is not going to affect labor agreements with Republic and SkyWest employees, because American is not a party to those agreements.

Pretty much every entry level pilot job is near minimum wage.

My understanding is that American Airlines doesn't actually hire many entry-level pilots, and by the time you're experienced enough to be hired by any major passenger airline, you'll be making okay money.

The regional airlines, on the other hand — the ones running those little connector flights with CRJs and the like, branded "American Eagle" or "Delta Connection", with a four-digit codeshare and inferior snacks and entertainment — those are a lot less picky, and their pay is a lot more questionable.

This is absolutely true. The university I went to is known for its commercial aviation program, and draws students from all over the nation and world to learn to be airline pilots. So many of them end up with huge debts, because flight school is crazy expensive, and eventually take non-aviation related jobs out of school because they just can't afford not to. Only those that were probably already very well off, or have connections, or are extremely driven, will ever sit behind the stick of a commercial jetliner for one of the bigs.

It's a pretty interesting space. Pilots can make good money with seniority, but if they switch to another airline, they start at the very bottom again.

On the other hand, they do have collective leverage, as airlines can't quickly replace them.

Bankruptcy is only really bad to whoever is the "bagholder". This pretty much always includes share-holders, and then depending on the extent of the event, may also include less-secured debt-holders.

Bankruptcy is simply a tool in the restructuring toolbox.

I was thinking the other day about how American companies have continually gorged themselves on debt even after so many crises have been made so much worse by unhealthy balance sheets. I guess the taxpayer has always got their back. These are state owned enterprises in sheep’s clothing.

Why is one analyst's opinion news? The market still thinks their stock is worth $10.

Good question.

Here's two reasons why this particular one report is making the rounds:

1) It's unexpected. Sell-side analysts inherently have a conflict of interest as the parent company's bread and butter is investment banking/M&A advisory deals. They try not to issue "sell" reports since who wants to do business with a bank that is pessimistic about their future.

2) It's shocking. I don't think I have ever seen a bank issue a $1 price target on any (non-penny/non-fraud) stock. The last time I saw this was by a short seller (betting against Peleton). For a stock that's trading at $10+, saying this is akin to telling management, "we will probably never see you again so it's fine for us to say our goodbyes with working with you ever again."

So what's in it for Evercore (the investment bank here)? If Evercore is correct, they just got some good PR in the investing community as the first ones to "call it" once the dust settles (and maybe fame under the "Financial Troubles (2020-)" section of American Airlines wiki page).

Another related question though would be why the stock market jumps around in response to these "news" items if you trust that there is no new information that equity analysts get that isn't otherwise publicly accessible. Seems like people think that's bullshit though, or, they believe the analysts are smarter than them in terms of processing this public information. Regardless, whenever Goldman issues some report on a FAANG stock, expect some pretty big vol...

Airlines have always been a pretty crap business to be in. Older (hilariously formatted but still good) thoughts here: https://www.mcgill.ca/iasl/files/iasl/ASPL614-Airline-Financ...

This is fantastic. Lots of insight into the industry. Thank you for sharing!

Buying a debt-laden airline and trimming the fat + increasing yield while getting leverage on partners and expanding logistic capacity sounds like the ultimate Amazon move right now. Probably not AA, but I don't know... Southwest?

I'd be disappointed if it was Southwest, I always have a great experience with them. Wouldn't surprise me if they went with a budget airline and used the extra capacity that people don't fill with overpriced baggage to ship Prime products. It sounds like a nightmare to coordinate but I'm sure they could do it.

Obligatory joke: How do you make a million dollars in the airline business? Well, you see, you start with a billion dollars...

(real talk, who actually buys these stocks? they keep going so very bankrupt...)

The last time I bought AAL I profited heavily after they announced bankruptcy. They were pink sheet eventually and went from 17 cents to 12 dollars in a matter of a few years.

If that happens again with most airlines I personally will put as much in as I can and wait for a merger after a bailout

Edit to be fair I profited heavily based on an original buy that was 70 dollars total

Which airline stocks are you eyeing for?

United, American airlines and delta. Maybe Southwest and JetBlue, I wouldn't be all that surprised if they get bought up when the dust settles.

These are my picks because they may go bankrupt but they will get a bailout or cash infusion like always. They are not going to cease to exist.

At what price target are you going to buy them? And will they still be available in traditional brokers: vanguard/Fido/schwab when they tank all the way to 50cents?

The fed bailed out the fucking junk bond market, but we'll see lots of legit companies go bankrupt in the next few years as this plays out.

Politicians have confused the shutdown. It was intended to reduce the likelihood of overwhelming the hospitals, but it seems it's been interpreted as protecting people from getting infected. That was never going to happen, but nobody wants to talk about it.

What do you mean? Hospitalizations are a function within the funnel. As more people get infected, more people get hospitalized. So, by protecting people from getting infected, you’re protecting from hospitalization. Idk what you’re trying to get at.

Flattening the curve doesn't reduce the total number of infections over the entire period of the pandemic. It just reduces the rate at which people get infected so that resources can be manageable [1]. This does reduce the total number of deaths, however, as more resources are available to help the infected.

1. https://www.wired.com/story/the-promising-math-behind-flatte...

I see what you mean now. I think the sense of urgency placed by politicians is in the right place- some understand that hospitalizations at time t (now) need to be controlled, and they've simplified the language to seem as if they are concerned about infections at this very instance for the sake of brevity.

It wouldn't be a stretch to say that reducing infections RIGHT NOW directly leads to reducing hospitalizations, so I can't blame politicians for mixing up the language.

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