Like most stocks, American Airlines Group (NASDAQ:AAL) has hit some turbulence. Eventually, though, AAL stock will find blue skies.
Shares of the Dallas-based carrier have slumped more than 60% this year as the novel coronavirus pandemic sent the entire airline sector into a tailspin. Warren Buffett, perhaps the greatest investor in history, didn’t help matters when he dumped all of the holdings he had in the sector.
Boeing CEO Dave Calhoun added fuel to the stock market fire earlier this month when he predicted that the worst health crisis in more than a century would bankrupt one major U.S. airline. While Calhoun didn’t name names, his comments were seen as a jab at American Airlines, which has an industry-leading $34 billion in debt.
Though it’s hardly a surprise that American’s CEO Doug Parker denied that Chapter 11 is in the company’s future, he is backing up his words with actions.
Under Parker’s leadership, American Airlines has gone into a cost-cutting mode. It plans on slashing operating costs and capital expenditures by $12 billion in 2020 as it shrinks its size. The company also is cutting its payroll. According to media reports, the carrier told employees that it would need to ax 30% of its administrative and support staff. American’s workforce of 130,000 is the largest in the industry.
Bolstering Balance Sheet
The CEO is also strengthening American’s balance sheet.
American raised $2 billion during the first quarter, through the issuance of $500 million of unsecured notes, a $1 billion 364-day-draw term loan facility, and about $477 million in aircraft financings. The company also reduced the pricing of its $1.2 billion term loan and extended it to 2027.
The carrier is getting $4.1 billion in direct financial assistance under the CARES Act and a low-interest rate loan of $1.7 billion. It has also applied for a separate $4.75 billion loan from the Treasury Department. Unfortunately, American needs to rely on government assistance since its access to the credit markets probably is limited.
As if that wasn’t enough, American will have reduced its cash burn to $50 million. The International Air Transport Association (IATA) recently raised its forecast for 2020 passenger revenue losses caused by the worst health crisis in more than a century to $314 billion. However, the bad news has been baked into the AAL stock price and the shares of its competitors.
Mixed Opinion on AAL Stock
Wall Street analysts don’t know what to make of AAL stock. Seven of them rate the stock as a hold, and an equal number considers it a sell. Four have either buy or strong-buy ratings. Their price targets range from $1 to $27.
Parker, though, seems like he’s making the best of a bad situation. As the U.S. economy opens up, people will start to travel, and American’s business will improve. That’s why the stock is a buy at these depressed levels. Expectations are so low that even a slight hint of outperformance will send the stock soaring.
However, other airlines, such as Southwest Airlines (NYSE:LUV), Delta Airlines (NYSE:DAL), and UAL (NASDAQ:UAL) may be a better buy. They are trading at double-digit percentage discounts to their average 52-week price targets. Shares of Dallas-based Southwest, for instance, have a potential upside of about 11%. The median price target of Wall Street analysts on Southwest is $38 after shares have slumped more than 37% since the start of the year.
Shares of Delta have plunged more than 50% in 2020. DAL stock is trading at nearly a 30% discount to its median 52-week price target of $34. UAL shares have plunged more than 66% in 2020. Wall Street analysts have a median price target on UAL stock of $38. That’s 27% higher than where it currently trades.
Want the whole group? Airline exchange-traded fund U.S. Global Jets ETF (NYSEArca:JETS) offers exposure to all of the above, with this list sitting among the top five holdings of the 34-stock portfolio.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams. As of this writing he did not own any of the aforementioned stocks.