Due to the novel coronavirus pandemic, plenty of folks are scaling back holiday travel plans this year, but airline equities aren’t being punished. Over the past month, the U.S. Global Jets Index is up 17.47%. American Airlines (NASDAQ:AAL) is leaving that benchmark in the dust as AAL stock is up 42.25% for the month ending Dec. 14.
Larded with debt – $40 billion as of mid-September – and previously in dire need of government assistance, American isn’t a quality stock. Rather, it’s one of the dozens junky, risky names that breathed new life into the recent broader market rally.
That’s not condemnation of American. The Texas-based carrier’s woes and those of the broader industry are factored into share prices. And, some of those issues aren’t abating. For example, the airline recently said it expects fourth-quarter daily cash burn to come in at the higher end of a previously announced $25 million to $30 million range.
“Rising COVID-19 case counts and associated travel restrictions have resulted in a slowing of net bookings growth, which has persisted into December,” according to a statement issued by the carrier.
AAL Stock Faces New Normal
Forgive the above use of “new normal.” It’s a phrase investors are hearing too much of this year, but it’s also relevant, particularly in the travel and leisure industry. American is trying to change with the times, providing would be passengers with at-home Covid-19 testing kits.
Of course, with $40 billion in debt, American can barely afford to give sodas and peanuts away on its flights. So it’s charging $129 per test, taking some the sheen of the altruism. It’d certainly be cheaper and perhaps more effective to tell passengers about the study conducted by Harvard’s T.H. Chan School of Public Health. It found that a plane full of properly masked crew and passengers has scant Covid-19 transmission risk.
“The use of face masks is critically important throughout the air travel process, from entering the airport for departure to leaving the destination airport,” according to the Harvard study. “When the use of masks is implemented with other measures built into aircraft operations, such as increased ventilation with HEPA filtration in the aircraft and disinfection of surfaces, these layered [interventions] offer significant protection from acquiring COVID-19 through air travel.”
Vaccine Challenges
Suffice to say, it’s easy to understand why American and other airline equities are so tethered to vaccine news. Ah yes, the long-awaited coronavirus vaccine. The one developed by Pfizer Inc. (NYSE:PFE) and BioNTech SE (NASDAQ:BNTX) arrived in New York on Dec. 14. However, AAL stock declined on the day.
Here’s what’s vexing for airlines and their investors in the new vaccine landscape. A new ABC News/Ipsos poll reveals 44% of Americans are going to wait before getting vaccinated and 15% don’t want to do it all.
Amid expectations that vaccines won’t be readily available until mid-2021, American and its rivals are hamstrung by not only that timeline, but also how much longer beyond that time the wait-and-see crowd will, well, wait.
Timing Matters
Further muddying the waters for American is the timeline for an airline industry recovery isn’t changing. The Wall Street consensus is 2023. This is the same forecast investors were hearing months before it became apparent vaccine progress was being made.
As noted in the above poll, the existence of a vaccine doesn’t mean “normal” will rapidly return. While there’s likely plenty of pent up leisure travel demand, corporate travel – the bread and butter of airlines – could take longer to bounce back.
Additionally, at 11x earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR), which is high by the carrier’s historical standards. AAL stock isn’t priced to perfection. But the company needs to show investors it can deleverage and keep adjusting before the industry returns to 2019 norms.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
