American Airlines (NASDAQ:AAL) hasn’t had a great couple months, but I believe there’s reason to take a closer look at AAL stock.
As American deaths from the coronavirus tragically rise and many in the media seek to make the news about the virus as negative as possible, it’s easy to believe that the world will have trouble emerging anytime soon from a near-apocalyptic situation.
But recent developments leave me hopeful that much of the world will, sooner than later, return to living near-normal lives. Those developments, along with the government’s bailout of the airlines, leave me upbeat on all of the shares of America’s airlines.
Positive Developments and AAL Stock
For many weeks, I’ve been writing that data showed that the coronavirus was spreading very slowly in warm countries. As a result, I theorized that the spread of the virus would greatly slow when the weather gets warmer in the U.S. and Europe.
But until very recently, most of the media cast doubt on that view, and the federal government’s top experts did not confirm it.
That’s changed recently, as the government’s top infectious disease expert, Dr. Anthony Fauci, has started to tentatively admit that the coronavirus will indeed spread much more slowly in the warm weather. Meanwhile, perhaps not coincidentally, Fauci and the other top expert coordinating the government’s response, Dr. Deborah Birx, by the end of March were projecting much lower fatality totals than at least one prominent estimate that was made earlier in the month.
Specifically, as of March 30, Fauci and Birx estimated that, if the current mass closure strategy continues, 80,000 to 200,000 Americans would die from coronavirus. That is a high number of fatalities. But, at the midpoint, it’s well over 50% below the 475,000 Americans that, on March 12, The New York Times estimated could die, even if mass closures were instituted.
Also worth noting is that the bottom end of the government’s estimate range is 80,000, while about the same number of Americans died from flu during the 2017-2018 flu season.
Meanwhile, the White House and experts now estimate that coronavirus’ spread will peak in the U.S. in the second week of April, not far off from my previous estimate of the first week of April. And some analysts recently predicted that, sometime around June, antibody tests will likely clear 60% of the American workforce to return to their jobs.
The Implications for American Airlines
In my previous article on American Airlines, I wrote that “the stock could become attractive around the beginning of April, ahead of the likely lifting of travel restrictions and the deceleration of the coronavirus.”
I also advised investors to wait until Congress had approved a bailout for the airlines before buying the shares, and I contended that “by mid-May, as the weather really heats up, fears of air travel are also likely to ease.”
After the recent developments I outlined above, I largely stand by my previous views. The experts now believe that the U.S. will not have many hundreds of thousands of fatalities. Such a large number of fatalities, in my opinion, would have left a real, permanent scar on the nation and could have crippled demand for flying for many years to come.
Further, the experts now also apparently think that the virus’ spread will start decelerating in mid-April and that its spread will continue to decline as the weather warms. Finally, the antibody test will help ease many Americans’ fears of the disease in general and flying in particular. Given these points, I continue to believe that air travel will begin to rebound meaningfully at some point in May before accelerating greatly in June.
Finally, I believe that American Airlines and other airlines can ease the fear of flying by emphasizing, through advertisements, the strong filtration systems on airplanes and the extra cleaning that they will undoubtedly perform on their planes.
The Bottom Line on AAL Stock
I believe that the federal bailout will take bankruptcy off the table for American Airlines and its peers for at least the next six months. Clearly, Congress wanted to prevent the airlines from going under due to coronavirus, and the $60 billion it appropriated for that purpose, matching the sector’s request, is almost definitely enough money to accomplish that task.
Meanwhile, the temporary restrictions on dividends, stock buybacks, and executive pay shouldn’t weigh much on the shares of American Airlines and its peers. As the well-known expression goes, “profit is the mother’s milk of stocks,” and none of those restrictions should interfere with the companies’ profitability.
As a result, I expect AAL stock and the shares of the other U.S. airlines to lift off once the demand for flights starts surging in May, and I recommend buying the airlines’ shares at their current levels.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not hold a position in any of the aforementioned securities.