Over the past month, the airline industry has been hit hard by the spread of the novel coronavirus. The demand for air travel disappeared practically overnight, and all of the major airlines are feeling the effects, including American Airlines (NASDAQ:AAL). AAL stock is down more than 19% in the last month.
Things have been looking up for the industry since Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which appropriates $50 billion in relief to the airline industry and will likely help reduce layoffs and give companies a bit of short-term breathing room.
This stimulus money should help keep companies like American Airlines afloat for the time being, but the AAL stock will still struggle if demand for travel doesn’t resume quickly. And even with a $50 billion airline industry bailout, American Airlines may not be a great investment going forward.
Here are three things you should consider before investing in AAL stock.
Carrying a Heavy Debt Load
American Airlines has more debt than any other air carrier. By the end of 2019, its debt had reached a staggering $33.4 billion.
The fact that AAL stock already had this kind of debt load, before the global health crisis, is problematic. Even with the stimulus bill and other cost-cutting measures, this kind of debt gives the company a lot less flexibility.
American recently announced that it has access to $2.73 billion from three different lines of revolving credit. This indicates that the company will likely have to take on even more debt to survive the oncoming recession.
Scrambling to Conserve Cash
American Airlines has taken steps to conserve its cash and simplify operations. The company announced its plans to retire many of its jets, including 34 Boeing 757s, 17 Boeing 767s, 20 Embraer E190s, and many others. In total, the company plans to take 156 jets out of service.
The company has also drastically cut back on its summer travel schedule to accommodate the decline in demand. AAL cut its international travel schedule by 60% and is postponing new routes it had planned for 2020.
Cost-cutting Will Only Help AAL Stock so Much
Ultimately, cost-cutting measures will only help American Airlines so much. Until demand returns to the airline industry, these efforts will only slow the company’s losses. This is likely why the company is considered a moderate Sell on Wall Street and was recently downgraded by Goldman Sachs.
AAL stock is down almost 60% year to date, faring a bit worse than peers, as seen in the near 55% decline for the U.S. Global Jets ETF (NYSEArca:JETS), the exchange-traded fund that has American Airlines in the number two spot at 12.37% of its 34 holdings.
To be sure, this stock rises and falls on sentiment, gaining slightly in recent days as investors were feeling more upbeat about the stock after news passed that health conditions are improving in Europe and New York.
This could indicate that airline travel could begin improving in the coming months. However, it will still take the industry a long time to recover from the pandemic. So in spite of the low price, it’s probably best to avoid AAL stock for the time being.
Jamie Johnson is a personal finance freelance writer and has been writing for InvestorPlace since mid-2019. She writes for a number of other well-known financial sites, including Credit Karma, Quicken Loans and Bankrate. As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.
