The adverse economic impact of the COVID-19 outbreak is being felt by many industries and shares, including the American Airlines (NASDAQ:AAL) stock price. Year-to-date AAL stock is down more than 51% while the S&P 500 index is off 18.6%.

With last week’s approval of a big rescue for the aviation sector, investors are wondering how concerned they should be about the future of travel and tourism shares, especially of airline stocks.

Today I’d like to discuss the segment and AAL stock more in detail so that you can make a better-informed decision about your holdings.

We’ve Had Industry Bailouts Before

President Trump signed a $2.2 trillion economic rescue package into law March 27 that includes more than $50 billion for commercial airlines, including $25 billion in direct grants.

CEO Doug Parker said the carrier could get $12 billion in federal assistance, although there are questions about what sort of conditions grants and loans could come with.

Many investors will know that this is not the first time that the federal government has come to the rescue of industries and companies. For example, following the events of 9/11 in 2001, Congress passed the “Air Transportation Safety and System Stabilization Act” and approved a $15 billion bailout package for the airline industry.

We had also witnessed the concept of too-big-to-fail in the aftermath of the 2008/09 financial crisis, when several industries received crucial help from the government. However, there was widespread criticism at the time. The public, many politicians, and analysts felt that the bailout package then had not done much to for the average American. Furthermore, many companies, including airlines, had spent their extra cash to buyback shares and increase compensation for corporate executives.

On the other hand, the current bailout package aims to address a number of points that are likely to help protect jobs for airlines employees. In other words, it comes with several strings attached. The stimulus package “would prohibit stock buybacks and share dividends for at least a year after the loans have been repaid. It also restricts executive compensation.”

Bye-bye to Buybacks

According to a recent Barron’s article, “from 2009 to 2018, 465 companies in the S&P 500 index spent $4.3 trillion on stock buybacks, equal to 52% of their combined profits … In the airline industry alone, American, Delta, United, and Southwest, as well as Fedex and UPS, spent heavily, with $77 billion in buybacks (56% of profits) and $35 billion in dividends (25% of profits).”

Now that airlines will not be able to buy back their shares or offer dividends, it is quite difficult to make a long-term bullish case for most airline stocks.

At this point, the government is hopeful that these payments will help stabilize the nation’s air transportation system. However, holders of AAL stock as well in other airlines should keep an eye on potential industry developments in the coming weeks and months. This is a dynamic situation that may change rapidly.

Cost vs. Revenue Imbalance

The economics of running an airline are quite complex. Overall, it is quite expensive to run an airline. The business is capital intensive and substantial investment is needed. From purchasing to maintaining hundreds of planes, management has to plan quarters ahead.

At the end of the day, like any other company, airlines such as AAL, need revenues to cover operating costs and become profitable. The industry’s two largest operating costs are fuel and labor.

Sources of operating revenue, say for American Airlines, include passenger, cargo, excess baggage and certain other transport-related revenue.

Analysts highlight the importance of economic activity such as GDP levels on air traffic growth and profit levels. They also regard the industry as cyclical. Cyclicality would mean that AAL stock would rise when the economy is growing and fall when the economy slows down.

Fewer passengers and fewer flights lead to declining revenue and profits for airlines companies, which pressures their share prices. Furthermore, the narrow margins at which airlines operate can be worrisome.

Therefore, if you believe that we may be headed for an economic recession, you may want to review your exposure to AAL stock.

Price Action Means More Volatility Ahead

Airline shares have been tumbling as coronavirus fears continue to ripple through the markets. And recent headlines have not been happy reading for investors in American Airlines.

So far in March, AAL stock is down over 44%, which means the shares are now deep in a bear market. The 52-week price range has been $35.24 (April 15, 2019) and $10.01 (March 23, 2020).

If you are an investor who also pays attention to technical charts, short-term price action would urge caution. The AAL share price is likely to be volatile with a downward bias.

Most airline shares had not fully participated in the broader stock market rally we witnessed in 2019 or in early 2020, either. Over the 12 months, AAL stock price has instead fallen about 55%.

From a technical chart perspective, it is likely that AAL stock price may once again test the recent low of around $10. The company is expected to report Q1 earnings in the last week of April. Therefore if you are not yet a shareholder, you may first want to analyze the quarterly results at the time.

Investor Takeaway on AAL Stock

The safety and stability of the nation’s commercial airline system is vital. However, despite the much needed rescue package, not all airlines may be able to survive a big shock such such as the one we are now witnessing.

Until we have more clarity on the global fight against the virus, there will likely be more turbulence ahead for airlines shares such as AAL stock.

Buying when markets are in a free-fall takes courage. After all, so many news headlines are propelled by rather dire predictions. But if you liked a given stock several weeks ago for solid fundamental reasons, you would probably like it more when the price is lower.

Many analysts indeed believe the recent crash gives investors a buying opportunity as markets tend to bounce back, usually in matter of months. Nonetheless, shares of airlines may go even lower after you buy into a company like American Airlines.

Therefore, any decision regarding your portfolio holdings, especially in sectors that are directly affected by the economic consequences of the global pandemic, should be made within your own risk/return profile. You may also want to talk to a financial adviser regarding your own circumstances.

I personally would not be willing to buy airline stocks at this point.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.