Don’t Take a Flier on American Airlines Shares

The shares in American Airlines Group (NASDAQ:AAL) have been gaining altitude lately, along with other operators in the sector like United Airlines Holdings (NASDAQ:UAL), JetBlue Airways (NASDAQ:JBLU) and Delta Air Lines (NYSE:DAL). The rally for AAL stock began in late October when the price was $11. As of now, the shares are trading around $15.80 and the market capitalization is at $9.5 billion.

An American Airlines (AAL) airplane waiting on the tarmac. Represents airline stocks.
Source: GagliardiPhotography /

Now AAL stock is still way off its 52-week high of $30. But then again, the recent rally is certainly encouraging.

The main reason for this? Of course, it’s about the innovative novel coronavirus vaccines from companies like Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA). The effectiveness rates have been proven to be much better than expected. There are also minimal side effects.

It’s true that the roll out has been disappointing. But during the past week, there are signs that things have been improving. The incoming Biden Administration also has an ambitious program for vaccine distribution. Thus, by the summer, the world economy may get back to some type of normalcy – which is certainly good news for AAL stock.

In the meantime, the company has been streamlining its operations. There is also the boost from the government assistance as well as the $900 billon fiscal stimulus.

So yes, all this is very good. But for investors looking at AAL stock, I actually still think there should be some caution. For the most part, the rally may have been overdone.

Let’s see why.

The Issues

The next quarter could be challenging for American Airlines. While December air traffic hit the highest levels since the start of the Covid-19 pandemic, there has been leveling off. Unfortunately, the death rates and hospitalizations continued to rise. And this is likely to lead to depressed demand for travel.

Investors may see the drop-off as temporary and continue to buy AAL stock. But there is another nagging issue as well: business travel, which is a big source of revenue for the company.

Even with the vaccines, there could be several years of lower activity for this segment. Let’s face it, with the wide-scale adoption of technologies like Zoom (NASDAQ:ZM), businesses adapted to adapt to far less business travel. Besides, it seems unlikely that conventions and conferences will make a comeback this year because of the need for long-range planning. According to a Bank of America (NYSE:BAC) survey of 25,000 business travelers, about half of the respondents indicated that the vaccines would not be a factor in improving business travel. In fact, only 14% said they would increase travel.

Rather, it seems that those airlines that have large vacation and leisure travel businesses will likely do much better. Examples include Southwest Airlines (NYSE:LUV) and Allegiant Travel (NASDAQ:ALGT).

Another issue for AAL stock is that it’s financials are dicey. The debt load is a hefty $47.5 billion and the cash balance is $8.3 billion. The company also announced in December that the fourth quarter is likely to see cash burn at the higher end of the range of $25 million to $30 million.

Bottom Line on AAL Stock

The management team at American Airlines has definitely gone a great job. There have been a major restructuring and cost cuts. There also has been a streaming of operations to adjust to the lower traffic.

But again, in terms of AAL stock, it seems like investors have been over eager. The rebound will likely be choppy and underperform expectations.

Interestingly enough, Wall Street analysts are fairly glum on the prospects for AAL. Consider that the price target is $11.58, which assumes 26% downside from current levels. In other words, there appears to be considerable risk with this stock.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling.  He is also the author of courses on topics like the Python language and COBOL

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