Airlines were among the equities most adversely affected by the novel coronavirus pandemic and American Airlines (NYSE:AAL) was certainly part of that trend. The carrier isn’t out of the woods yet, not by a long shot, but AAL stock surged 41% on June 4 as investors embraced news of better-than-expected travel demand.
Investors paying even casual attention to airline stocks during the Covid-19 outbreak are hearing plenty about demand. As in what’s the appetite for air travel going to look like following a viral pandemic that’s forcing unemployment to Great Depression levels?
Apparently, demand for flights is brisker than even the carriers themselves anticipated as highlighted by Thursday comments from American:
“In response to improving demand for air travel, American is planning to fly 55% of its domestic schedule and nearly 20% of its international schedule in July 2020 compared to the same period last year,” said the Texas-based company in a statement. “The airline’s July systemwide capacity amounts to approximately 40% of July 2019 flying.”
There were inklings of a resurgence late last month as American said it flew an average of 110,000 passengers per day over the final week of May, well above the dismal April daily average of 32,000.
Encouraging Details on AAL Stock
In a typical vibrant economy and bull market for stocks, such as the one that ended at the hands of Covid-19, airline investors have the luxury of painting with broad strokes.
What I mean is that when times are good, an investor considering American, Southwest Airlines (NYSE:LUV) or any of the carriers, simply needed to know that the economy was sturdy, labor relations were solid and oil prices were manageable.
American is a great example of that sentiment. Through years of the most recently deceased bull market and economic expansion, the carrier feasted on debt, making it vulnerable to a swift economic contraction, regardless of the reasons for that downturn.
While American’s balance sheet remains fragile and is flimsy compared to, say, Southwest, there are some encouraging near-term signs regarding day-to-day operations.
Translation: investors mulling this stock ought to consider to where the carrier is saying it’s increasing flights.
“The airline also increased frequency of flying to Asheville, North Carolina (AVL), Savannah, Georgia (SAV), and Charleston, South Carolina (CHS) for business and leisure travelers,” according to the statement.
There’s more. American said it’s going to offer more flights than any other carrier to Florida in July. That’s a sign that leisure travel is perking up and tourists want to visit Sunshine State beaches or Disney World, which is slated to come back online in July.
On a related note, American said it will increase routes to Colorado, Montana, Utah and Wyoming next month, “as national parks and outdoor recreational spaces reopen and customer demand for these destinations continues to recover.”
There are other positive details for airline investors to consider, including better-than-expected bookings in the cruise space. And, of course, some Las Vegas casino operators saying they’re going to up room capacity more rapidly than they originally planned because the initial batch available reservations are flying off the shelves.
Bottom Line on American Airlines Stock
It cannot be ignored that much of American’s enterprise value is represented by debt and that, by the carrier’s own admission, higher-margin international travel demand is going to be slower to rebound.
The company has some moves it can make to enhance liquidity and reduce debt, including tapping some of the $10 billion in assets it holds. That could include following the lead of some other carriers in using sale-leaseback transactions on jets it owns outright.
The leverage is a concern. There’s no getting around that, but if American proves it is on a path to normalcy and that a return to 2019 capacity levels is possible by late 2021 or early to mid-2022, markets could continue rewarding the stock.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
