It’s no surprise that airline stocks have been among the hardest hit names as a result of the coronavirus pandemic. It’s hard for them to make money when no one is flying. American Airlines’ (NASDAQ:AAL) stock has shed over 60% since mid-February. Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A,BRK.B) has been hammered by its exposure to airline stocks and sold off part of its stakes in two airlines on Friday to reduce its exposure to the sector. Is that a signal that investors should avoid airlines? Or has the weakness of AAL stock created a buying opportunity?
There are some pretty big variables in play, including the duration of the coronavirus disruption, government assistance programs, and the potential for a post-pandemic recession. At this point, those factors do not appear to be favorable to airlines.
The Coronavirus Disruption
The coronavirus pandemic has decimated air travel. American Airlines has been hit hard by the collapse of passenger travel. Last week, the company announced that it was parking hundreds of planes and offering many fewer flights. American will offer 80% fewer trans-Pacific routes this summer compared to last year. It will fly 65% fewer trans-Atlantic routes and 48% fewer flights to Latin America. The company has scrapped plans to launch new routes later this year, and it is also evaluating its domestic flying schedule.
The bottom has fallen out of the demand for flights, and that is going to hammer American’s bottom line for the foreseeable future.
What about the $2 trillion stimulus package? The CARES Act does provide over $50 billion in aid for the airlines, but it comes with stipulations.
Among the requirements are that airlines that receive assistance must continue to fly to domestic destination they already service. And the Treasury Department has the right to “demand warrants, options, preferred stock or other securities in exchange for the grants.” The airlines’ executive compensation is capped, and there are restrictions on stock buybacks and dividends.
The public is not very sympathetic to the airlines. Writing in the New York Times, Columbia law professor Tim Wu argues against ever letting airlines return to the status quo:
“We cannot permit American and other airlines to use federal assistance, whether labeled a bailout or not, to weather the coronavirus crisis and then return to business as usual. Before providing any loan relief, tax breaks or cash transfers, we must demand that the airlines change how they treat their customers and employees and make basic changes in industry ownership structure.”
The current situation is a brutal one for American Airlines in particular and the air industry in general. However, the sector may get little in the way of relief once the coronavirus pandemic finally runs its course. That’s because the economic damage that’s already been done is expected to trigger a recession.
With millions of workers laid off, businesses shuttered and households recovering from the financial hit of coronavirus, vacations will be on the back burner. That’s not good news for American Airlines.
The Bottom Line on AAL Stock
At this point, all airline stocks have taken a hit. So American Airlines is far from alone.
Airlines are surviving now thanks to loans and government assistance. However, they can only borrow so much (AAL has just $110 million remaining on its existing credit lines), and the government’s assistance comes with strings attached. There is also intense public pressure against “bailing out” airlines.
The investment analysts surveyed by CNN Business, on average, have a “hold” rating on American Airlines. Their $15.00 median 12-month price target is 36% above the stock’s current price, but the variables at play make AAL stock a risky bet at this point. The fact that Warren Buffett is losing faith in airline stocks at this point isn’t a great sign either. American Airlines seems likely to have more turbulence ahead, making it an investment suited primarily for long-term, bullish investors.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.