Government Bailout Gives American Airlines Stock Speculative Chances

Advertisement

President Donald Trump’s administration bailed out American Airlines (NASDAQ:AAL), but it can’t make people fly. It also can’t single-handedly save AAL stock.

3 Reasons to Think Twice Before Investing in American Airlines Stock

Source: GagliardiPhotography / Shutterstock.com

A $5.8 billion check from the government keeps the company out of bankruptcy. Another $4.8 billion loan may come soon.

This gets American Airlines through the worst of the novel coronavirus pandemic. It means the company is back to flying.

But that doesn’t make AAL stock worth buying.

The New Normal for AAL Stock

In its earnings report for the March quarter, American reported a loss of $2.2 billion. This was cut in half through non-cash write-downs of aircraft which were taken out of service, and special deals with its unions. The airline said it ended the quarter with $6.8 billion of liquidity and that government aid means it will end June with $11 billion.

Those bullish on the airline insist “data continues to support COVID-19 as only slightly above the seasonal flu.” This is based on the idea that, if everyone were being tested, only 0.1% of those who have the virus would die.

A federal grant will pay American Airlines’ employees through September. It can now break even on just $2.2 billion of revenue each quarter, 20% of its previous level, flying planes at 30% capacity.

To get traffic to that level, American has announced new cleaning procedures. It will give passengers sanitizing wipes and face masks. Passengers will be required to wear masks starting May 11.

Meanwhile the airline is facing a surge of Covid-19 cases among ground personnel. Thousands of pilots and flight attendants have taken early retirement. The government calls the impact of the virus on the industry “worse than 9/11,” justifying the giveaway.

If You Fly Planes, Will Passengers Come?

The question is, with the airline propped up by the government, will people fly?

Right now, the answer is no. The number of passengers going through airport security at the end of April was just 5% of its level from a year ago, about 129,000. American is flying more long-haul cargo than people.

Long before the virus, airlines were publicizing their air circulation, trying to alleviate passenger concerns. Airline cabin air is refreshed 20 times per hour, running through HEPA filters, with separate ventilation every seven rows. The Centers for Disease Control and Prevention insists viruses don’t spread easily on planes.

While HEPA filters are effective against bacteria, Covid-19 is caused by a virus, which is much smaller. A visualization making the rounds on Twitter (NYSE:TWTR) shows that a single cough, recirculated, can spread the virus throughout the cabin of a Boeing (NYSE:BA) 767. Worse, people can be shedding the virus without symptoms. Banning sick people from planes will not, by itself, prevent this spread.

There are long-term fixes. Putting air circulation systems in the floor of the cabin can help. Columbia University is experimenting with ultraviolet light. Boeing has been working on self-cleaning bathrooms. But none of these innovations will be available in 2020.

The question is whether all this publicity will get people back on planes, and when? The government bailout won’t last through the fourth quarter.

The Bottom Line on American Airlines

Buying AAL stock today is a speculation. Normal investment rules do not apply.

The market capitalization for American is down to about $4.5 billion, against $8.5 billion of revenue in the first quarter. But those results represent just one month under the pandemic. In the post-pandemic world, $8.5 billion could be a full year’s revenue.

The bailout was also short term. Many people objected to it, noting the large dividends and buybacks American engaged in when times were flush.

If American Airlines can become profitable at 30% of pre-pandemic capacity by September, it may be able to grow from there. That’s what you’re betting on if you buy AAL stock today. Just don’t make bets with money you can’t afford to lose.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/american-airlines-aal-stock-bailout-speculation/.

©2024 InvestorPlace Media, LLC