Friday’s 6% price jump in must have felt like a breath of fresh air for American Airlines (NASDAQ:AAL) stockholders. After all, the shares have been in a steady decline since early 2018. And, the coronavirus from China has steepened that price decline in February and March.
However, the one-day 6% price increase might have given investors false hope. A turnaround might not be in the offing. Conditions don’t look favorable for the airline industry. On the other hand, contrarian investors are supposed to buy when there’s blood on the streets, right?
So, is it time to buy the stock or not?
Deep Flight Cuts
You may have heard that President Trump has restricted travel to the United States from Ireland and parts of the United Kingdom. Furthermore, he was considering restricting travel to California and Washington, saying, “Is it a possibility? Yes, if somebody gets a little bit out of control, if an area gets too hot.”
There’s no way to know for certain whether travel restrictions will be imposed on U.S. states. It’s also difficult to accurately predict whether more international travel bans will be enacted. These are “known unknowns,” which have been priced into airline stocks.
Current and potential further travel restrictions have caused American Airlines and United Airlines (NASDAQ:UAL) to announce that they’ll be cutting flights from their schedules. United plans to cut around 50% of the airline’s flight capacity during April and May with the expectation that these flight cuts will “extend into the summer travel period.”
How does American measure up to United in this respect? One could say, better and worse. American Airlines plans to reduce the company’s international flight capacity by a whopping 75% through May 6. However, the company’s domestic-flight-capacity cut would be a comparatively smaller 20% in April and 30% in May.
No Soft Landing
These flight cuts are testing contrarians’ mettle as airline-stock prices are low but have the potential to go much lower. The coronavirus has tragically caused 6,500 confirmed deaths and around 170,000 illnesses worldwide according to one estimate. It’s hard to imagine that there won’t be more travel restrictions and flight cancellations ahead.
Stifel analyst Joseph DeNardi seems to concur that the challenges will persist. He observed, “Things are getting worse,” and predicted, “Given recent trends and chatter that some form of a domestic travel ban is likely, our estimates now assume United stops flying in 2Q20.”
That’s directed towards United Airlines, but we can reasonably assume that a domestic U.S. travel ban would also wreak havoc on American Airlines. According to a recent estimate from the International Air Transport Association, global revenue losses for passenger-airline companies could reach an astounding $113 billion this year.
It has been reported that American, United and possibly other airlines are currently seeking government aid. Allegedly, United Airlines chief executive officer Oscar Munoz “has spent the last two days in Washington, D.C., meeting with senior officials in the Trump Administration and senior members of the U.S. House and Senate in both parties to understand what government policies they may be considering and explain to them the impact that the coronavirus has had on our business.”
That’s a long-winded way of saying that the airlines need help now, and badly. Who really knows when they’ll get that help, and how much help they’ll get? That’s yet another unpredictable factor. President Trump did just pledge to “back the airlines 100%” and said, “We’ll be backstopping the airlines and helping them very much.” However, he hasn’t yet attached a precise dollar amount or time frame to that pledge.
The Takeaway on AAL Stock
There are just too many “known unknowns” to take a chance on AAL stock with any real confidence. It’s fine to be a contrarian. However, only highly risk-tolerant investors should go anywhere near this one. And if you do, please be aware that profits might not come for quite a while.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.
