When the novel coronavirus first struck the U.S., being stuck inside a flying tube with possibly hundreds of other sick passengers was the last thing anyone wanted to do. As a result, companies like American Airlines (NASDAQ:AAL) tumbled badly in the fallout. It also didn’t help that many analysts consider AAL stock the weakest in the bunch that includes sector heavyweights like United Airlines (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL).
But the month of June was a bright spot, at least for the first few days. On a broader level, a surprisingly positive May jobs report, where the economy added 2.5 million jobs, gave the markets a much-needed lift.
Specific to AAL stock, American announced that it was adding more flights, suggesting a quicker-than-expected recovery in the travel industry. Also, management stated that they were targeting zero cash burn by year’s end.
Obviously, big talk grabs the headlines. But as initial jobless claims poured in, the numbers continued to show millions of workers filing for unemployment benefits. This suggested that the pain initially suffered by lower-income workers was now spreading to other, higher-paying professions.
However, it wasn’t all bad news for AAL stock. According to data from the Transportation Security Administration, passenger volume has been picking up significantly. On average, daily volume in June was about 18.5% that of the year-ago period. However, in the second half of June, the average capacity is 21% of last year’s volume.
This compares very favorably to the 16.3% volume in the first half. Also, this trend demonstrates that people are tired of being cooped up at home.
Still, can investors trust what has been a wild ride in American Airlines?
Litany of Problems Cloud AAL Stock
Obviously, the first concern anyone would have toward the airliner industry is the coronavirus. In recent days, new daily infections have jumped to record highs. Logically, you would expect some negative impact to hit travel demand.
Psychologically as well, the rising cases represent a sizable setback. After health experts claimed that our collective efforts succeeded in flattening the infection curve, many states – including staunchly liberal ones – began opening for business. However, with the spike in cases, several states have either paused or reversed their reopening measures.
To be fair, there’s an argument that the resurgence is based on media hype. For instance, the daily number of deaths associated with Covid-19 appears (thankfully) to be trending downward. At the same time, you don’t want to play games with the unknown.
And with AAL stock, it’s not so much about what is real. Instead, it’s what people (or passengers, I should say) believe is real. If enough think it’s a serious problem, American Airlines could receive a harsh reality check.
Further, I’m concerned about business travel, or the potential lack thereof. Should Covid-19 cases continue to worsen throughout the country, I don’t see any reason for corporate America to reopen. And in this situation, the cases don’t have to be serious (i.e. hospitalization grade).
It’s enough to show that the risk of mass infection exists. Plus, I don’t see big corporations willing to chance the liability issues of forcing their employees to travel. Having already established remote work platforms, why take unnecessary chances?
Finally, I’m not getting a good read on automotive traffic data. For example, TomTom.com’s traffic index for Los Angeles shows that congestion was down 63% against the year-ago level for the week ending June 28. If people are traveling, what happened to the numbers?
International Community Is Shunning the U.S.
Perhaps it’s a high-level tit-for-tat. Whatever the case, the European Union plans to prevent most American travelers from entering their territory. The reason? As you guessed, the EU deems that the U.S. has failed to contain its coronavirus outbreak.
Others might call this situation poetic justice. It’s a complete reversal from what happened earlier this year when President Trump banned afflicted nations and regions from coming into the U.S. Now, the tables have turned.
Personally, I don’t have a dog in this fight. I have zero interest in traveling to Europe right now. Besides, I doubt the locals would want me there.
However, it’s another challenge for AAL stock. While management has been talking a good game, it needs substantive tailwinds to lend credibility to its bullishness. Yes, some data points are moving in the right direction. But with other factors shifting unfavorably, I’ll continue to take a pass on American Airlines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
