American Airlines Stock Will Remain Turbulent for Awhile

Stocks to sell

Like its peers, the performance of American Airlines (NASDAQ:AAL) stock is largely determined  by news involving the novel coronavirus.

After a Brief Lift, AAL Stock Has That Sinking Feel Again

Source: GagliardiPhotography / Shutterstock.com

The shares underwent a peak-to-trough decline of more than 76% when the Covid-19 shutdown went into effect in the U.S., then more than doubled in the wake of the reopenings. But the shares have since given back nearly all of their gains.

With the world’s largest economy halted for much of the second quarter, hurting air travel, American lost $7.82 per share in Q2, 12 cents worse than analysts’ average estimate. But somehow the carrier notched revenue of $1.62 billion, beating the mean forecast of $1.44 billion. Consequently, the stock rose after the July 23 report. But AAL stock is still a challenged, risky name.

American Will Survive, But Will It Thrive?

In the near-term, American’s status as a going concern isn’t in much doubt. As of June 30, the carrier had $10.2 billion of cash, procured a $4.75 billion loan from the Treasury Department and sold $1.2 billion worth of senior notes for a combined liquidity tally of $16.2 billion. That’s more than double the company’s market capitalization.

Broadly speaking, the older carriers, such as American and Delta Air Lines (NYSE:DAL), are well-capitalized and can survive for a long time. While their liquidity is crucial, investors should also consider their costs and what carriers are doing to reduce their cash-burn rates. Fortunately, American’s cash-burn rate is improving, declining to $30 million per day in June from $100 million per day in April.

“This improvement was driven by higher than forecast revenue and larger savings resulting from the company’s cost-reduction initiatives,” said the carrier. “The company’s second-quarter cash burn rate was approximately $55 million per day vs. its previous forecast of $70 million per day.”

In this environment, a lower burn rate is positive.  But also important is how the rate was reduced. In the case of airlines, declining daily costs were largely caused by reducing staff and cutting capacity.

That means the outlook of American will largely be tied to coronavirus and the recent spike in cases, many of which are happening in prime summer tourist destinations, such as California and Florida.

“While May and June revenue trends were encouraging, demand has weakened somewhat during July as COVID-19 cases have increased and new travel restrictions have been put into place,” according to American.

The carrier declined to give financial guidance for the back half of 2020. But it did say it would match capacity with booking trends and that it expects third-quarter capacity to plunge 60% year-over-year. In other words, the U.S. is in the midst of a second Covid-19 wave, and that’s giving travelers pause about boarding planes.

The Bottom Line on AAL Stock

Plenty of other travel and leisure segments besides airlines are feeling the effects of the “coronavirus curse.” However, for airlines and cruise operators, the second wave is a setback of epic proportions.

When the U.S. economy emerged from the first Covid-19 shutdown and air-travel bookings were better than expected, some analysts speculated that demand for flying could return to  2019 levels more quickly than expected. But that theory didn’t account for a second wave of the virus.

Since the virus isn’t going to disappear and a vaccine won’t be ready in the near-term, investors thinking about buying AAL stock and the shares of other airlines are faced with the specter of current anemic demand staying in place well into 2021.  Consequently, it could be 2023 before the industry returns to its 2019 levels.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

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