When it comes to airline stocks, the news seems to be going from bad to worse.
Earlier this week, British airline Virgin Atlantic filed for Chapter 15 bankruptcy protection in U.S. federal bankruptcy court after proceeding with a similar filing in the United Kingdom. Virgin Atlantic joins other carriers such as Chile’s LATAM (OTCMTKS:LTMAQ), German Airways and RavnAir, Alaska’s largest regional airline, in filing for bankruptcy.
According to International Air Transport Association, the novel coronavirus pandemic will cost airlines $419 billion in lost revenues this year as global demand remains down 54% from 2019. U.S.-based airlines have warned that as many as 70,000 jobs in the sector could be eliminated this fall when a current round of federal aid expires.
President Donald Trump recently expressed his support for providing American carriers with an additional $25 billion to help them survive and retain employees. The additional aid for airlines is gaining some bipartisan support in Congress, but is by no means a done deal.
Regardless of the outcome in Washington, D.C., many more airlines around the world are forecast to file for bankruptcy between now and the end of 2021. Given the dire situation facing air travel around the world, investors would be wise to avoid airline stocks for the time being. Here are four airline stocks to leave on the runway.
Airline Stocks To Sell: American Airlines (AAL)
American Airlines has been harder hit by the Covid-19 downturn than any other U.S.-based carrier. For the second quarter, American Airlines reported that its revenue plunged 86%, leading to a $2 billion loss between April and June.
While other major U.S. airlines reported similar losses in the second quarter, American’s situation is complicated by the fact that it is the largest carrier in the world with the most international routes and the biggest fixed costs. During the second quarter, American Airlines averaged daily losses of $55 million, compared with $43 million for Delta Airlines (NYSE:DAL), $40 million for United Airlines (NASDAQ:UAL) and $23 million for Southwest Airlines (NYSE:LUV).
Exacerbating problems for American Airlines is also its debt load. The carrier has $34 billion of debt, by far the highest among U.S. carriers and $10 billion more than the debt of rivals Delta and United.
American Airlines recently warned 25,000 employees that they are at risk of being furloughed starting Oct. 1 unless more government aid is forthcoming. While steps have been taken to preserve cash and keep American Airlines operating, with forecasts that demand for air travel will remain depressed for several years to come, it’s unclear how long the carrier can keep going.
While there is currently a “hold” rating on AAL stock, seven of 20 analysts recommend shareholders “sell.” The median price target on American Airlines stock is $10.50 per share, about 20% below the current share price. The low estimate has AAL stock trading at only $1 a share.
Air Canada
Canada’s flagship carrier wasn’t doing that great before the pandemic hit. But since Canada’s government closed its borders and ordered citizens to shelter in place, Air Canada’s business, and its share price, have fallen off a cliff.
The carrier, which trades on the Toronto Stock Exchange under the ticker AC, recorded a $1.75 billion loss in the second quarter as revenues cratered 89% year-over-year. In response to the current situation, Air Canada has cut 20,000 jobs, permanently retired 79 aircraft (30% of its overall fleet), suspended domestic routes and cut its network capacity by 92%. Yet the moves seem unlikely to be enough.
With losses mounting at a rate of $20 million per day, Air Canada Chief Executive Officer Calin Rovinescu has launched a public campaign to lobby the federal government of Prime Minister Justin Trudeau to let the carrier fly again.
In particular, Rovinescu has been pressing for the reopening of the U.S.-Canada border so that Air Canada can resume lucrative cross border flights to popular sun destinations such as Miami, Florida and Phoenix, Arizona. So far, the federal government in Ottawa has ignored the pleas.
None of this bodes well for AC stock. Year-to-date, Air Canada’s share price is down 70%. And the outlook doesn’t look good. U.S. analyst coverage of the Canadian airline is spotty. But the company has said that it doesn’t foresee things turning around for at least three years.
Lufthansa (DLAKY)
The largest German airline, and leading European carrier, has been extremely hard hit by the Covid-19 pandemic. After posting a record loss of $2 billion for the second quarter, the company has been struggling to wring concessions from its various unions as it tries to implement deeper cost-cutting measures.
It hasn’t been easy. Talks with its three unions have dragged on for more than two months now, and two of Lufthansa’s unions have yet to agree to a single concession. The carrier has said it needs to urgently cut 22,000 jobs and remove 100 aircraft from service if it hopes to weather the current financial storm and eventually pay back billions of dollars in state aid it received from the government.
Lufthansa recently said that it does not see the global aviation industry turning around in earnest until at least 2024. And, as the company also owns smaller air carriers in Austria, Switzerland and Belgium, management has said that it cannot afford to continue bickering with its unions much longer.
Chief Executive Officer Carsten Spohr has said that involuntary layoffs are now a necessity if Lufthansa is to survive. That could lead to a wave of worker unrest and political backlash against the airline in the coming months.
All the drama has contributed to a depressed share price. DLAKY stock is trading at half its value today compared to the start of the year. Analysts who cover the company are forecasting that DLAKY stock will decline another 30% this year.
The median forecast of 19 analysts is for Lufthansa’s stock price to fall to 6.39 euros a share over the next 12 months. The company’s stock currently carries a “sell” rating, making this one of the top airline stocks to sell now.
International Airlines Group
International Airlines Group, known as IAG, is another dominant player in Europe. The holding company owns and operates several marquee airlines, including British Airways, Iberia (the flagship airline of Spain) and Aer Lingus (the flagship carrier of Ireland).
To say that the pandemic has been hard on IAG is an understatement. The company reported that it lost 2.2 billion euros in the second quarter of this year, more than all of its previous losses combined. Passenger traffic fell by 98.4% in the April to June time frame, according to IAG. The company, which trades on the London Stock Exchange, had hoped to be flying at 50% capacity by July of this year, but instead was at 20% capacity on Aug. 1.
To help it survive, IAG has announced a bold plan to raise 2.75 billion euros through a new stock sale. However, the stock sale needs the approval of shareholders, who will vote on the proposal Sept. 8. IAG Chief Executive Officer Willie Walsh has said the share sale is necessary to keep the company and its many flagship airlines operating.
And while Walsh has also said that he believes shareholders will support the stock sale, there are no current indications of how the September vote will turn out. Like Lufthansa, IAG is also actively involved in negotiating concessions with the unions at its various airlines.
IAG stock is down 72% year-to-date. U.S. analyst coverage of the holding company is thin, but with IATA forecasting that European based carriers will lose $21.5 billion in 2020, and that as many as 7 million jobs could be lost in the European aviation sector, things do not look great for IAG in the near term.
As of this writing, Joel Baglole did not own any of the aforementioned stocks.
