American Airlines (NYSE:AAL) looks like it might have had as bad a year as it can. For long-term investors, the novel coronavirus outbreaks might seem like a great opportunity to pick up battered airline stocks— but if the virus continues to rage on, airline carriers will start to drop like flies. AAL stock embodies this risk perfectly.
American made its way higher on Tuesday after suffering a nosedive last week following its second-quarter earnings release.
The firm reported a loss of $7.84 per share— which beat expectations, but the bar was low. No one was expecting American to perform well since Q2 carried the brunt of the pandemic’s wrath, but there’s a chance that Q2 wasn’t the bottom for airlines and that should be a scary prospect for AAL stock investors.
Headwinds and AAL Stock
The number-one red flag facing American stock right now is its insurmountable debt pile. The company is burning $30 million per day or $2.73 billion each quarter. That’s on top of the $40 billion the firm is already lugging around.
American is safe, for now. The firm says it has $16.2 billion worth of liquidity and is hoping to continue reducing cash burn significantly into 2021.
But as Savanthi Syth of Raymond James put it, “It’s little use filling the bucket if there is a hole emptying it out just as quickly.”
She noted that cash burn has become the most important metric with which to evaluate airline stocks.
What’s troubling, is that most investors are expecting Q2 to be the worst they see from AAL stock. But preliminary data shows that the demand for air travel has already started to decline as cases surge across several U.S. states. Not to mention that U.S. travelers have been banned or asked to quarantine for up to two weeks at many international destinations.
If a second wave is to hit the northern hemisphere in the autumn and winter, things may only get worse for airlines, and that will leave American desperate for cash.
American Airlines Stock Needs a Vaccine
That’s not to say there isn’t a case for AAL stock. In fact, InvestorPlace’s Mark Hake made a good one in an article published July 29. He is optimistic about the long-term potential for American Airlines, saying it could take two years for a full recovery, but that the stock is undervalued.
Hake could be right, but his thesis regarding the airline rests on one factor: a vaccine. First I’d argue that the chances of a vaccine might not be quite as good as the public seems to believe, the WHO warned as much over the past few days.
But more importantly, I’d ask: what if there is a vaccine and AAL still suffers. Just because a vaccine is created doesn’t mean the public will take it. Preliminary research shows huge portions of the U.S. population aren’t sure whether they’d be willing to take a coronavirus vaccine.
According to vaccine expert Dr. Walter Orenstein, distrust in the government is a huge obstacle to getting people on board with a vaccination. Couple that with the fact that this is the first time in history the world has watched every step from discovery to development happen at a record pace, and you have a recipe for concern.
It’s Not Time to Buy AAL Yet
The summer travel season is nearly over and air travel is declining. A second wave of coronavirus looks likely at the end of autumn and vaccine prospects are uncertain at best. Taking a contrarian view on airline stocks is one thing, but being the most indebted of the bunch is far too risky for me.
If anything, I’d load up on low-debt carriers that operate mostly within the U.S.—Southwest (NYSE:LUV) is one great example. For now, AAL simply doesn’t have enough upside to make it worth the risk.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.