American Airlines (NASDAQ:AAL) may prove to be among the most resilient of the hard hit travel sector. But while it could suffer significantly in the near term, there is still some hope left for AAL stock to rise again.
Things remain gloomy for the airline sector amid the novel coronavirus pandemic that has left airplanes sitting idle on tarmacs around the world. The S&P Supercomposite Airlines Industry Index has fallen about 60% since the market peak of Feb. 20, when a broad global selloff of equities began. By comparison, the S&P 500 Index is down about 12% over the same period.
Famed investor Warren Buffett has dumped all his airline holdings, and Boeing (NYSE:BA) Chief Executive Officer David Calhoun has predicted that at least one major U.S. carrier will be kaput by year’s end. Empty planes, rising gas prices and mounting debt loads have many industry observers sounding the death knell for the sector as a whole. Industry trade group Airlines for America claims that U.S. carriers are losing $10 billion a month. As the largest U.S. airline with the most international routes, American Airlines has become the poster child for an industry in crisis.
Yet, reports of American Airlines’ demise may be premature. Despite being among the hardest hit sectors during the pandemic lockdown, glimmers of hope are starting to emerge for the airline industry. Shares of airlines soared on May 18 following positive data released by the Transportation Security Administration (TSA) that showed a growing number of airline passengers passing through its security checkpoints. The data suggests a post-Covid-19 recovery has already taken root. Responding to the TSA numbers, the U.S. Global Jets ETF (NYSEARCA:JETS) rose 11.6%. Shares of American Airlines jumped 9.2% on the news after closing May 14 at a 52-week low of $8.25 per share. Other airline stocks, including Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL), also rose on the TSA news.
More good news for the industry came on May 19, when Southwest Airlines (NYSE:LUV) said it was adding several domestic flights in June as demand for air travel gathers steam. Southwest forecasts that its annual capacity decline will be 45% in June, less severe than May’s annualized capacity decline of 70%. While it is still too soon to predict a V-shaped recovery for the airline industry, signs are emerging that the worst could be behind the major U.S. carriers.
Upside Potential
Value investors who can stomach some turbulence in the near-term should view AAL stock as a cheap long-term play at current levels. Consider that the consensus view of 20 Wall Street analysts is to “hold” the stock at the present time. The average 12-month price target on AAL stock is $16.88, suggesting that it has upside potential of 70%. The high price target for it is $34.00, which would see it more than triple from current levels of under $10 per share.
Investors should also consider that American Airlines is taking several steps to cut costs and position itself for success on the upswing once the U.S. economy fully reopens. Since mid-March, the Dallas-based carrier has cut 80% of its international passenger flights, expanded its cargo-only flights to Asia-Pacific where reopening is ahead of North America, enhanced its customer loyalty program by offering travelers 500 extra bonus miles under its “AAdvantage” loyalty program and adjusted its international routes to focus on more heavily trafficked and profitable destinations.
While these steps are unlikely to spare the airline short-term pain, they should help position the carrier (and by extension AAL stock) to rebound once the economic recovery from Covid-19 is in full stride — capitalizing on pent-up demand among travellers.
Government Support
While the current environment is bad, potential investors should also keep in mind that American Airlines is also receiving support from the U.S. government. The airline has been approved for $5.8 billion in financial assistance from the U.S. Department of the Treasury under the “Payroll Support Program (PSP)” that was created through the Coronavirus Aid, Relief and Economic Security (CARES) Act. The money is being used to cover salaries and benefits and is comprised of a direct grant of $4.1 billion, and a low-interest loan of $1.7 billion.
In addition to the $5.8 billion, American Airlines has applied for a loan directly from the U.S. Treasury worth $4.75 billion. This money should keep the airline afloat through the end of September, at which point reopening among U.S. states should be at its peak and we could be close to a vaccine against Covid-19.
As the largest U.S. carrier, and with so much taxpayer money invested already, it is unlikely that the government would let American Airlines go down without a fight. “Too big to fail” may be a cliche, but it could apply to an airline that is not only the biggest in the U.S., but the largest in the entire world as measured by fleet size, passengers and revenue passenger miles. American Airlines carries more than 200 million people a year and is a major employer with nearly 130,000 staff stationed around the world. A collapse of American Airlines would negatively impact both the aviation industry in the U.S. and the wider world.
American Airlines has been here before. After airplanes were used as weapons during the 9/11 terrorist attacks, industry analysts predicted that the airline sector would never recover. AAL stock took a hit following the attacks, falling as low as $1.58 a share. But American Airlines, and the broader industry, adapted, implemented new security measures and recovered. The stock climbed near $60 a share in 2018.
The Bottom Line on AAL Stock
While it is true that American Airlines’ stock is vulnerable during the current Covid-19 pandemic lockdown, it would be unwise to bet against the carrier long-term. Investors with a time horizon of five years or longer should look at AAL stock as a bargain at its current price and consider the growth potential that will surely be unlocked in the coming years once the coronavirus pandemic is behind us all.
As of this writing, Joel Baglole held shares of American Airlines.
