Since falling to an $8.25 low in April, American Airlines Group (NASDAQ:AAL) is holding the $10.00 level. Markets have a wait and see approach on AAL stock because its business recovery depends on passenger traffic rebounding.
Realistically, investors should expect a sustained uptrend in air flight demand in the coming weeks. Businesses are opening across the United States, and as companies hire back staff and at-home workers travel, expect business travel levels increasing.
In the last week (week of May 18 – 22, 2020), the Transportation Security Administration reported that total travel throughput increased by around 33%. This is also more than triple from the April lows.
|Date||Total Traveler Throughput||Total Traveler Throughput|
|(1 Year Ago – Same Weekday)|
Data courtesy of TSA
The airline industry has a long way to go before it reaches last year’s traveler count in the millions.
Cargo Flights Positive for AAL Stock
Instead of waiting for passenger traffic levels to recover, American Airlines expanded its all-cargo international flights. It now operates 140 weekly all-cargo flights. By “medical supplies, personal protective equipment (PPE), perishables, and other time-sensitive freight around the world,” American Airlines is playing a role in fighting the spread of Covid-19, which could help keep AAL stock from falling too much further.
At a time when cross-border trading and transport are sharply reduced, American is in a good position to keep such essential goods as medical equipment and food supplies sent to places that need it. And in a post-Covid-19 world, AAL may want to continue growing its cargo transport business. It has retired Boeing (NYSE:BA) 767s that are being turned into cargo planes.
Airlines for America endorsed plans to include temperature checks of passengers and airline and airport employees.
Although this does not eliminate the risk of spreading the coronavirus, it will at least discourage people who are ill from boarding a plane. Still, the temperature check is not fool-proof. For example, this study in Pittsburgh found that 5% to 20% of subjects who had been exposed to the coronavirus only noticed none to mild illness.
The Centers for Disease Control may mandate airports to check temperatures. Any prevention tool available will help minimize spreading the virus as the economy opens.
Adding staff to screen passengers, wipe down planes, offer masks, gloves, and hand sanitizer will add to the airline’s costs. AAL will likely pass the costs to its customers. And when more flights resume and run at lower capacity, it may increase plane ticket prices. This is a necessary step in operating the business at above break-even levels.
AAL Stock Fair Value
Investors may build a 5-year discounted cash flow model: EBITDA exit model. Assume revenue plunging in the next two fiscal years and then recovering thereafter:
|(USD in millions)||Input Projections|
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
|% of Revenue||13.60%||-22.30%||25.00%||20.00%||25.00%||22.50%|
Data Courtesy of Finbox
At a discount rate of 7%, American Airlines stock is worth around $13 a share. On Wall Street, 17 analysts rating the stock have an average price target of around $14.00. Investors need to balance their optimistic view of a sales rebound next year against the average sales growth in the sub-3% range:
|Sales Growth Next Year||53.70%||46.20%||11.30%|
|Sales 1‑Year Chg (%)||-2.30%||8.10%||17.20%|
|Sales 3‑Year Avg (%)||2.70%||9.90%||12.20%|
Data Courtesy of Stock Rover
As shown above, American’s growth trails that of the S&P 500. The good news is that its sales growth will outpace the industry next year.
Investors should watch daily TSA passenger data as well as the progress of the re-opening in the United States. The more businesses re-open, the greater the need to travel domestically, whether for business or tourism.
Along with social distancing practices on all flights, passengers will feel at ease when boarding a plane.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.