American Airlines Group Inc (AAL)

[thewhale]

I think many are overreacting to weakness in the Latin American market. There’s weakness in capacity reduction in Venezuela and travel to Argentina and Brazil, but it’s Venezuela that’s gotten everyone’s attention. Especially the $791 million (and growing) of AAL’s cash sitting down there.

Yields out of Venezuela are nearly 4 times other South American destinations. This is because so many passengers are paying full fare, premium ticket prices. Many are doing this to exploit a currency arbitrage situation where the official SCIAD 1 exchange rate established by the Venezuelan gov’t is about 10.6, but the black market rate is 6 to 9 times that.

As far as AAL’s cash and a potential special charge, nobody knows. If you take the $791M (valued at 6.53) and reduce it by the SCIAD 1 rate (about 10.6), the difference is -$304M.

AAL’s 2Q earnings were spectacular. They’re using cash to strengthen the balance sheet and also return value to investors (dividends and stock buybacks). For this, they’ve been penalized by the market, like the kid who brought home a test grade of 97% when the parents demand 100%.