American Airlines (NYSE:AAL) doesn’t have more obstacles to recovery than other airlines. However with a weaker balance sheet it is starting from further back in the pack. Some investors will find the possibility of grabbing AAL stock at single digit prices attractive. I’d caution against that.
The company was recently burning through $70 million in cash every day. And, in the best case scenario, and after a slew of cost-cutting measures, AAL may reduce that burn to $50 million a day. But in addition to a poor balance sheet, American Airlines lacks a clear differentiator that will give it an advantage.
American Airlines is pounding the table to say it will not have to declare bankruptcy again to see the other side of this pandemic. But airline stocks in general are a risky trade right now, and investors can’t afford to invest dollars in players that are finishing anywhere other than first place. And that’s not going to be American.
Demand Still Remains Unclear
The Covid-19 disease that stems from the novel coronavirus has now claimed over 100,000 American lives. No matter how you feel about the virus, that number is sobering. But despite that number, opinions about the virus still vary widely. And some of that have to do with your belief about whether the death count is accurate.
A recent poll conducted by the Economist/YouGov found that approximately two-thirds of respondents are somewhat to very worried about contracting Covid-19. But in that same poll, 11% were not worried at all and another 25% were “not too worried” about getting sick.
For many Americans (who may or may not be asymptomatic) this still feels like a dream. We’ll wake up and this will all have been our imagination. Lest I offend, I’m not suggesting that the virus is a hoax. It’s just that the virus is not the reality for hundreds of millions of Americans. And some of those Americans are going to get on an airplane and fly.
But there are also many Americans who are still afraid to leave their homes and have no intention of doing so for the foreseeable future. It’s safe to say they won’t be flying.
So that leaves a muddy middle that you can lump into the category of who knows? And that’s a tough way to run an airline.
Fun With Statistics
In the quest for green shoots, airlines are being quick to report any statistic that shows news that is less bad. One of the statistics you’ll hear is that airlines, such as American, are increasing their load capacity. In simplest terms, load capacity defines how full a flight is. American is reporting that its load capacity is up to 35%. So that means, on an average American flight, 35% of the seats are filled.
But that 35% takes into account the company flying at severely reduced capacity. And American knows it. That’s why they just announced they will be cutting their management and support staff by approximately 30%.
And it’s why in an internal letter obtained by USA Today, executive vice president of people and communication, Elise Eberwein, said American “…must plan for operating a smaller airline for the foreseeable future.” Eberwein added, “We (American) will be a smaller airline, with fewer routes and fewer flights.”
American is not alone. United Airlines (NASDAQ:UAL) will initiate layoffs in October when federal funding from the CARES Act expires. United President Scott Kirby says travel demand is essentially zero.
All of this is to say that a 35% load capacity may be a green shoot; but it’s one you need a magnifying glass to see.
There Are Better Bets Than AAL Stock
I’ve written about airlines for much of the last two months. I’ve written that I think Southwest Airlines (NYSE:LUV) may be more likely to bounce back because it won’t be under as much price pressure to compete in a low-fare environment.
But even with that optimism, I didn’t recommend buying LUV stock until later this year. And I was far more negative on Delta Air Lines (NYSE:DAL), and Delta had a better balance sheet prior to the pandemic.
My InvestorPlace colleague, Thomas Niel recently suggested that American Airlines may be a good buy with prices in the single digits. I’ll concede that for traders, American in the single digits may be too juicy to pass up. However, even as a trade, I still think AAL stock does not have enough juice to make it worth the risk.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
