As Stimulus Euphoria Wears Off, American Airlines Stock Is a Sell

Stocks to sell

After a lot of debate, the airlines got their government aid package. Traders cheered, if only for a moment. As is often the case, though, it quickly turned into a “sell the news” moment. With the positive catalyst behind us, airlines stocks are sinking again as folks consider the longer view. It’s great that the airlines got vital near-term liquidity. But it will be just a drop in the bucket compared to the plunge in transportation demand thanks to the novel coronavirus. Investors were especially quick to dump their shares of American Airlines (NYSE:AAL) as AAL stock has tumbled about 12% since last Wednesday.

aal stock

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Furthermore, American’s shares are down 22% in the last month. Simply put, despite the government extending funds to the airline industry, it doesn’t look like the aid will be enough to turn the tide for weaker players within the sector.

Strings Attached

While investors cheered the news that the government and airlines had reached an agreement on the bailout, the terms were not quite as positive as some had hoped for. The government will be getting warrants in the airline stocks, allowing taxpayers to get a decent chunk of the gains if and when airline stocks recover. Uncle Sam could end up owning 3% of American Airlines, for example.

More broadly, the airlines had to accept strict limits on laying off employees, paying dividends, and various other ordinary corporate initiatives. JPMorgan’s analyst, Jamie Baker, slammed the agreement, saying: “What was once thought to be free, formulaic, and easy turned out to be drawn out, somewhat expensive, and intense.”

Baker added that the government’s decision to provide loans instead of grants will reduce protections for  airlines’employees. That could create further expenses for the airlines and potentially cause tensions with their unions as well.

Still Looking For More Money

Even after the huge government aid package, the airlines are still searching for additional funds. American and the other airlines are seeking loans from the Payment Protection Program created by Congress. American  wants another $4.7 billion dollars in loans on top of the $5.8 billion in loans and grants that it already pulled in.

That should show the severity of the situation. American got its grants with considerable, but not intolerable, restrictions. If that $5.8 billion was all the airline needed, it would have a reasonable shot at making a strong recovery. But within days, it was already out hunting for more cash. Needless to say, the more desperate American looks as it tries to scrounge up money, the more expensive its loans will come.

Fly With a Safer Carrier

The government aid was a lot better than nothing. In aggregate, the airline industry has something tangible to give it hope during this difficult time. However, the aid is limited enough that it is far from a cure-all.

As a result, investors should focus on the airlines with the best balance sheets. By using that strategy, they will have protection against losses even if the sector’s efforts to raise more funding coming up short. In a recent column, I described why Southwest Airlines (NYSE:LUV) is the most secure choice within the airline industry.

Heading into this crisis, Southwest had the best debt/EBITDA ratio. This figure measures a company’s debt load in comparison to a key metric of profitability. Southwest was the only major airline whose debt/EBITDA ratio was less than one, indicating outstanding financial health.

Delta Airlines (NYSE:DAL) was the strongest of the three big legacy carriers. American, by contrast, was the weakest of the bunch, as its ratio was nearly five to one. And its debt will continue to mount as the crisis wears on and it asks for more and more loans to keep paying the bills.

The Verdict on AAL Stock

With the government bailout now officially approved, airlines are on somewhat surer footing. They have access to capital, albeit with significant restrictions and conditions. However, it just doesn’t look like the funding will be enough for American Airlines.

It was arguably the weakest airline among the major U.S. carriers heading into this crisis. People were drawn to the stock because it was cheap and could deliver the most potential gains in a blue skies scenario. But stormy weather is the forecast for at least the next year, so the prior bull argument no longer applies.

American Airlines simply isn’t worth the excess risk at this point. Since its rivals like Southwest have much better balance sheets, American Airlines is a needlessly speculative purchase at this point.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.  At the time of this writing, he held no positions in any of the aforementioned securities.

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