August has started on a positive note for shareholders in many U.S.-based airlines like American Airlines (NASDAQ:AAL) stock. Since finishing July at $11.12, AAL stock is up around 20%, flirting with $13.5. Now, investors are wondering what may be next for the shares.
Recent checkpoint travel numbers released by the Transportation Security Administration (TSA) reveal important details. On Aug. 12 “total traveler throughput” as reported by the TSA was 590,749, down from 2,391,906 a year ago. The next day, the International Air Transport Association (IATA) highlighted how air travel demand would be unlikely to recover in the coming months.
The COVID-19 pandemic has hit the airline industry particularly hard. On Sept. 30, the government grant money provided via the CARES Act ends. Market participants are wondering if there may yet be another air package for these battered travel companies.
Therefore today, I’d like to discuss AAL stock more in detail to see if it should belong in a long-term portfolio. If you are not yet a shareholder you may want to wait for a pull-back toward the $11-level before committing new capital into American Airlines. Here’s why.
Q2 Results and AAL Stock
Prior to the novel coronavirus, the group offered an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries.
On Aug. 13, CNBC reported American Airlines “is preparing to scrap flights serving two-dozen medium and small cities as the expiration of federal coronavirus aid that placed restrictions on carriers from cutting service approaches.”
This move shows how deeply concerned management must be regarding continuing costs and lack of substantial revenue generation.
The investing community was ready for poor Q2 results from airlines and American’s numbers were quite dismal. On July 23, the group announced second-quarter metrics. Revenue came at $1.62 billion. It was 84.6% lower than the $11.96 billion from the second quarter of 2019.
The quarterly loss was $7.82 per share. A year ago, the airline had reported earnings of $1.82 per share. Operating loss of $2.49 billion was a completely different story than last year when it had had an operating income of $1.15 billion.
American Airlines ended the second quarter with approximately $10.2 billion of available liquidity. It also agreed with the U.S. Department of the Treasury for $4.75 billion secured loans, which is expected to close in the third quarter.
As summarized by CEO Doug Parker, “This was one of the most challenging quarters in American’s history.”
Following the release of the quarterly statement, AAL stock traded mostly sideways in the rest of July, between $11 and $12.
What Could Derail AAL Stock in the Short-Run?
So far in the year, AAL stock is down over 43%, which means the shares are now deep in a bear market. The 52-week price range has been $31.67 (Oct. 28, 2019) and $8.25 (May 14, 2020).
In general, investors continue to be optimistic that a coronavirus vaccine could be available soon and help airlines, as well as other companies, get back to normal a normal demand sooner rather than later. And that optimism has lifted share prices, including AAL stock, since the lows seen earlier in the year.
Over the past several months, airlines, including American, have been working hard to secure liquidity. The industry has also been petitioning for a substantial aid package from the government, which it has received through the CARES Act.
However, the serious financial challenges American Airlines and its peers face remaining difficulties to overcome in a short period of time and with the amount of money given by the administration.
The U.S. Department of Transportation provides important information on the net income levels of all U.S. carriers. Those numbers for 2020 clearly reveal the uphill battle airlines are currently facing. If in the coming weeks, we get not-so-favorable data on traffic from the Transportation Security Administration, then a sell-off in airline shares would be likely.
Are you an investor who also pays attention to technical charts? Then, short-term price action would also urge caution. AAL stock may once again come under pressure and fall toward $10-$11.
If you are currently a shareholder, you may consider initiating a covered call position. For example, a September 18-expiry ATM covered call would decrease the volatility of your portfolio and at the same give you some downside protection. As importantly, it’d also enable you to participate in a potential up move.
The Bottom Line
The safety and stability of the nation’s commercial airline system is vital. However, given the uncertainty they are facing, not all airlines may be able to achieve a V-shaped recovery. Until we have more clarity on the global fight against the virus, there will likely be more turbulence ahead for airlines shares such as AAL stock.
InvestorPlace contributor Thomas Niel has recently written why investors in AAL stock should not discount a Chapter 11 filing. I agree with him that the airline’s critical amount of debt burden will continue to hinder the business from creating value. As a result, its future earnings power will be limited, too.
Finally, if you’d still like to have exposure to AAL stock, but don’t want to have the full volatility that may come with it, you may instead consider investing in an exchange-traded fund. Examples of such ETFs are the U.S. Global Jets ETF (NYSEARCA:JETS), the SPDR S&P Transportation ETF (NYSEARCA:XTN) or the First Trust Nasdaq Transportation ETF (NASDAQ:FTXR).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.
