Things haven’t been looking good for the major airlines, American Airlines (NASDAQ:AAL) included. AAL stock is down more than 70% from a year earlier, incurring most of those losses in just the last few months.
And the airline took an additional hit last week after Warren Buffett announced that Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) sold its remaining airline stocks. Shares of American Airlines, Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV) and United Airlines (NASDAQ:UAL) all fell considerably as a result.
Warren Buffett takes a long-term view on investments, so if he doesn’t think AAL stock is worth hanging onto, that could be a major cause for concern.
And Wall Street has become increasingly pessimistic when it comes to the stock as well. AAL stock is considered a moderate sell, and the stock was recently downgraded from equal weight to underweight by a Barclay’s analyst.
Truth be told, there are many reasons to consider bailing on the airline industry right now. Recovery is expected to be a long and slow process, even as states slowly begin reopening.
So if you’re wondering whether AAL stock’s low price point is a reason to invest or a reason to stay far, far away, here are three things to think about.
American’s Downsizing Won’t End Soon
At the beginning of April, 2.4 million people were being screened by the TSA on a daily basis. By the end of the month, that number had fallen to a mere 124,000 people per day. And during the entire month of May, most airlines expect to do less business than they did on a single day during May 2019.
This sudden loss of customers and revenue has forced companies like American Airlines to downsize considerably. The airline recently put its entire Airbus (OTCMKTS:EADSY) A330-200 fleet in storage. This helps the company cut down on costs because it doesn’t have to pay for maintenance.
Plus, it makes sense, given that the airlines expect to be flying a lot fewer people in the coming months. It’s likely that we could hear of more pilot retirements in the months to come.
American Airlines Will Likely Lay Off Employees
So far, the airline industry has not been subject to any massive layoffs, and most employees have been able to hold onto their jobs. This is largely thanks to the $2 trillion stimulus package from the federal government.
Companies like American Airlines received payroll assistance, provided that they keep their employees on through Sept. 30. But that could change come Oct. 1.
Airline stocks took a hit earlier this week after a report surfaced that United Airlines plans to cut at least 3,400 positions come October. The report quoted a memo from Kate Gebo, the executive vice president of human resources at United.
“We have to acknowledge that there will be serious consequences to our company if we don’t continue to take strong and decisive action, which includes making decisions that none of us ever wanted or expected to make,” Gebo wrote in the memo.
The CARES Act bought the airline industry some time, but if travel demand doesn’t pick back up, it’s likely that we’ll see layoffs happening across the board.
AAL Stock Has a Heavy Debt Load
One of the biggest risks American Airlines faces right now is its heavy debt load. The company received $5.8 billion thanks to the CARES ACT, and raised an additional $2 billion.
This brings its total debt to a staggering $24 billion. The company’s total debt is much higher than any of its competitors and puts it at a significant risk for insolvency.
American Airlines was already facing plenty of challenges with the novel coronavirus, and its debt only adds to this. CEO Doug Parker summed up the company’s position with the following statement, “Never before has our airline, or our industry, faced such a significant challenge.”
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.
