In my last article about American Airlines (NASDAQ:AAL) in late April, just before the airline released its first quarter of 2020 results, I suggested that I didn’t see much happening to AAL stock after earnings, good or bad.
As far as I was concerned, it would be the second-quarter results in July that would move its stock up or down. Until then, it was basically dead money. Since April 28, it’s mostly traded in a fairly tight range between $10 and $11.
Is AAL Stock Destined for Single Digits?
In March, I argued that American’s stock seemed destined for single digits. Yet as I write this, it’s at $10.47. However, in another article in early March, I called AAL a “risk-takers dream stock.”
On the one hand, it’s not hard to see that the airline is suffering greatly under severely reduced revenues combined with significant debt added to survive the daily cash burn. But on the other hand, it’s hard to imagine air travel not getting back to normal by 2021 or 2022.
Long-term, AAL stock seems like a natural five-bagger.
If this were a company-specific issue, it would be so much easier to figure out whether the stock is a buy or not. However, these same issues exist across the industry. No one’s been spared.
Now, with staff cuts of more than 5,000 people from American’s management and support staff (MSS) expected in the fall, which is on top of voluntary retirement from thousands of its pilots and flight attendants in April, it’s easy to think CEO Doug Parker is making the tough calls necessary to keep American from going bankrupt.
I’m no airline industry HR expert, but once you let these people go, especially the pilots, it’s going to be very difficult to get them back should travel return to pre-Covid-19 volume. I’m not saying that’s going to happen tomorrow, but funnier things have happened.
You just don’t know.
Too Much Debt
Parker appeared at an industry conference on May 27, putting to rest rumors that it or one of the other big airlines would enter bankruptcy protection shortly.
“Bankruptcy is failure. We’re not going to do that,” Parker said May 27. “I don’t think people should view bankruptcy as a financial tool; it’s failure.”
He went on to state that he thinks all of the airlines will be just fine in terms of liquidity during the pandemic, and none will go under. Those are mighty confident words. However, you can’t ignore the fact the airline has an incredibly large amount of debt. InvestorPlace’s Mark Hake recently discussed this very subject.
“[A]t the end of March, American Airlines had over $24.5 billion in interest-bearing debt. This does not include $15.7 billion in other current liabilities as well as $20.4 billion in other non-current liabilities. For example, it has a $6.1 pension liability on its balance sheet,” Hake wrote May 19.
“So if you add in another three quarters of cash burn, there will be at least $15 billion to $18 billion in additional debt or convertible equity. My guess is that most of this will be debt. That will take American Airlines up to over $40 billion in total debt.”
That’s a tremendous amount of debt. I recently looked at the financial situations of all four major airlines. American is clearly in the worst position of the four, while Southwest Airlines (NYSE:LUV) is in the best position.
None of which suggests that any of them are screaming buys at the moment.
The Bottom Line on AAL Stock
At the same conference referenced above, Parker stated that American’s load factor (the average number of seats filled on a plane) was 56% during the Memorial Day weekend, much higher than the 15% load factor in April.
Parker also believes that the worst is behind it. If it can get business passengers traveling again, it will be on its way to better finances. The only problem is that American’s running on 20% of its normal schedule.
What happens when passengers get annoyed about paying high prices just to be stuffed in a crowded, Covid-19, Petri dish? It’s not going to be pretty.
I believe it’s imprudent for anyone, including Parker, to believe we are out of the woods on this crisis. Not by a long shot.
But like I said at the top, it’s hard to know what to do with AAL stock.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
