Don’t Take a Flyer on American Airlines

While American Airlines (NASDAQ:AAL) shares were able to rally over 50% in late March, the gains have mostly disappeared. Keep in mind that the shares are now not too far off from the 52-week low of $9.09. In fact, for the year so far, AAL stock off more than 65%.

Don’t Take a Flyer on American Airlines
Source: GagliardiPhotography / Shutterstock.com

Then again, with the impact of the novel coronavirus, there is little good news for the airline.  Last week, in an interview with CNBC, the company’s CEO, Doug Parker, noted that revenues are down a grueling 90% on a year-over-year basis.

Now it’s true – at least in the near term – the company’s liquidity should be sufficient. Of course, American Airlines accepted federal assistance from the $25 billion set aside as part of the massive $1.2 trillion stimulus bill, called CARES (Coronavirus Aid, Relief, and. Economic Security) Act.

The company will get a total of $5.8 billion from the federal government. This involves a grant of $4.1 billion, along with a low-interest $1.7 billion loan (the term is for ten years). These funds will be allocated for payroll and employee benefits.  Besides this, American Airlines is also seeking a $4.75 billion loan from the U.S. Treasury.

True, there were some strings attached. Keep in mind that American Airlines has issued warrants to the U.S. government, which could result in dilution of up to 3%. And yes, the airline will not be able to buy back shares and there cannot be any layoffs before Sep. 30th.

Yet despite this, the arrangement was still quite favorable. But unfortunately, this does not mean investors should buy shares either.

When Will Things Get Better?

Making predictions now is certainly challenging, if not foolhardy. Never before has the modern world economy been intentionally shutdown. As a result, there will likely be many unintended consequences, both for the long and short term.

But regarding air travel, it’s hard to make a case that there will be a quick recovery. Unless there is a vaccine, which could easily take a year to develop and roll out, or some types of treatments for the novel coronavirus, there will likely be many people who will simply not get on a plane. Let’s face it, tourism is discretionary.

And as for business travel, this would likely be limited too. Note that there will be more companies willing to handle business with technologies like Docusign (NASDAQ:DOCU) and Zoom Video Communications (NASDAQ:ZM). Oh, and when it comes to conferences, it will be quite some time until these return because of the planning requirements and costs.

In light of all of this, it should be no surprise that the CEO of Delta Air Lines (NYSE:DAL) recently wrote to employees: “We are confident that people will begin to travel again. We don’t know when it will happen, but we do know that Delta will be a smaller airline for some time, and we should be prepared for a choppy, sluggish recovery even after the virus is contained. I estimate the recovery period could take two to three years.”

Bottom Line on AAL Stock

I think that American Airlines will survive. The airline industry is a strategic asset for the U.S. economy. But if there is another bailout, the terms may not be as generous – which could mean even more dilution for AAL stock.

It’s important to note that Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B), which has a 10% stake in the company, has not made any purchases. Granted, this may ultimately mean nothing. Perhaps he is currently upping his position.

But I think his silence should be taken as a warning. Keep in mind that he recently unloaded 2.3 million shares of Southwest Airlines (NYSE:LUV) and 13 million shares of DAL. And if there are more sales, investors should really start to worry.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.  As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/american-airlines-stock-no-flyer/.

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