American Airlines (NASDAQ:AAL) stock is down over 65% in 2020. But quite frankly every airline in the world is facing the same issue. Demand for their services is essentially zero. And it will be for the foreseeable future. That’s not the headline story for AAL stock.
In no way do I mean to imply that the pandemic is not a serious event. But like other “Black Swan” events, it has put the entire industry on pause. And because all airlines face the same short-term consequences, it can be easy to think that every airline will benefit from a resurgence of consumer demand.
However the real problem for AAL stock is one of math. Unlike many of its counterparts, the company was not showing robust growth before the novel coronavirus pandemic. And that was in the middle of an unparalleled economic expansion.
The prudent investor knows that the industry will come back. And that’s why you have to look at the health of the company before the outbreak. Those companies will be in the best position to recover quickly. Unfortunately, American cannot make that claim.
American’s Balance Sheet Was Already Sick
American Airlines came into 2020 with $29.6 billion of adjusted net debt. That was 65% of the company’s 2019 revenue. Of the major airlines, including Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL), American is the one that can least afford to go further into debt. Yet, that’s exactly what is likely to happen. And that’s why you have to think twice before investing in AAL stock.
Thanks in part to a lobbying effort by Airlines for America, an industry trade group, AAL is likely to receive a portion of the $50 billion loan package requested from the U.S. government. And, as InvestorPlace’s Tom Taulli points out, American has friends in the right places. Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owns a 10% stake in the company and is unlikely to let it fail.
But it is clear that the electorate is not in the mood for bailouts. If American Airlines receives a loan, it is going to be expected to pay it back. However, it is in the worst position to do it. For an investor, that means it may take AAL stock longer to turn a profit than airlines with less pre-pandemic debt.
American has responded to critics, pointing out that it has $7.3 billion in liquidity, more than any other airline in the world. However, that cash is more than offset by the company’s debt burden.
The Audacity of Hope
A lot has been made about our country’s state of preparedness for the pandemic. For whatever reason, American Airlines made a tactical error in that regard. In early March the company issued guidance that seriously underestimated the lack of demand for its flights. On March 10, CEO Doug Parker stated the airline would reduce domestic capacity by 7.5% in April and international flights by at least 10% through the summer.
But less than a week later, the company was forced to provide a revised estimate. At that time, AAL announced it would institute a 30% cut in domestic flights and a 75% reduction in international flights in April. The airline also said those reductions will likely become deeper during May.
Investors don’t take kindly to downward revisions to begin with. But American was on a short leash with its history of share buybacks that are drawing the ire of investors and Congressional leaders. From July 2014 through 2019, American bought $12.4 billion of its own stock.
Would You Buy AAL Stock if There Was no Coronavirus?
Right now, AAL stock is a hard pass. It has to be. This is not an alarmist statement that suggests American Airlines will become insolvent. The airline will be ready and able to fly passengers after the travel guidelines are rescinded.
But when that will be and how soon consumers will come back are unanswerable questions, at least for now. Our world’s response to the virus is a science experiment being played out in real time. Our world’s response after the threat recedes will be the subject of doctoral theses for decades.
InvestorPlace contributor Nicolas Chahine makes a case that American Airlines may be too much of a bargain to pass up at this price. He may be right, but if you’re an investor who is looking at AAL stock, you have to know the consumer response before you consider investing.
Starting from an equal playing field, there are other airline stocks that are more attractive.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing Chris Markoch did not hold a position in any of the aforementioned securities.