American Airlines (NYSE:AAL) has been in the headlines frequently. And not in a good way — especially for those who own AAL stock. In the past week, these have included rumors of bankruptcy. American Airlines may not be circling the drain yet, but that doesn’t mean you should snap it up while it’s so cheap. There are plenty of other reasons to avoid this F-rated airline stock.
I’ve already detailed the direct impact of the novel coronavirus pandemic on airlines. The absolute decimation of passengers. The CARES Act funding, which includes provisions that forbid laying off of employees until October, requires maintenance of minimum service levels and restricts dividends. This time, I want to talk about headwinds airlines like American face in the longer term.
Environmentalists Hate Flying
As if the coronavirus pandemic wasn’t bad enough, forces are combining to reduce flying in the future because of its environmental impact. A growing number of university professors — especially those involved in climate research — had already been pushing back on flying. A single round-trip flight from Toronto to London has been calculated to roughly equal the CO2 emissions of an entire year of driving. That’s for each of the passengers on board the plane. To many academics, that level of contribution to global warming was both unacceptable and hypocritical.
You might rightly ask whether the actions of some determined academics to skip conferences is really going to affect the future of American Airlines. Alone, this may not cause any airline CEO to lose sleep. However, when you combine it with the move to online conferences as a result of the pandemic? That’s trouble.
Universities have discovered that a fully online conference is possible — saving a fortune in participant flights and accommodations. That cost savings is going to be more important with the specter of reduced enrollment (and a devastating loss of revenue) because of online classes.
The green movement against flying is showing signs of spreading beyond the academic community to consumers and corporations. With flights currently at record low levels, there is real risk so-called “flight shaming” will gain steam.
Will Business Flying Recover?
It’s not just universities. The airlines’ problems are much bigger than that.
Industry-wide, it’s estimated that business travelers represent just 12% of passengers. However, they are twice as profitable to airlines. That’s because business passengers pay for more expensive seating, often book last-minute, use frequent flier programs and purchase extra amenities.
In 2019, American Airlines was taking action to try to lure more of these lucrative business flyers. New programs included priority access to airport security and ticket lines for international business passengers. Business flyers would be given priority during service disruptions such as weather. They would also get perks like free access to preferred seating.
Until the global coronavirus pandemic is contained and a vaccine approved, niceties such as being whisked through the airport are over. Preferred seating is iffy. Instead, airport wait time is greatly increased. Companies run the risk of having an employee stuck in quarantine or self-isolation for days after taking a business flight.
Many companies including Apple (NASDAQ:AAPL) restricted business travel early in the pandemic. Facing revenue shortfalls and discovering that a video conference can eliminate the need for face-to-face meetings in many cases, some companies may never go back to the practice of having employees regularly hop on flights.
If business travel fails to recover to pre-pandemic levels, it spells trouble for American Airlines.
Everything Adds Up to Trouble for AAL Stock
It should come as no surprise that American Airlines has an F-rating in my Portfolio Grader.
AAL stock had already slumped 50% over the past two years before the coronavirus pandemic put it in crisis mode. At this point, it’s down 62% from its February high. It’s carrying more debt than rivals Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL) — roughly $34 billion.
Put all those factors together. The current punishing operating environment. The need to downsize. The possibility that we could be looking at another year or more before the coronavirus situation stabilizes. The restrictions that come with CARES Act funding. The debt load. And the building headwinds against air travel in general.
This does not make American Airlines a smart investment in my book, even at bargain basement prices. These are all signals to stay far away from AAL stock.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.