The last few years have been among the most challenging for the global airline industry. The troubles that started with the Covid-19 pandemic have taken a big toll on airline companies balance sheet and profitability. Geopolitical tensions and fuel price inflation have ensured that recovery for airline companies is sluggish, making it a good time to consider airline stocks to sell.
The possibility of a global recession also weighs heavily on the industry. If a recession lowers capacity utilization, cash burn will sustain for major airline companies. This would imply further stress for the balance sheet.
Companies that have a big debt burden would be prime airline stocks to sell. With high debt servicing cost, value creation for investors is unlikely.
Let’s therefore talk about three airline stocks to sell as macro-economic headwinds dampen sentiments.
|AAL||American Airlines Group Inc.||$15.21|
|UAL||United Airlines Holdings, Inc.||$41.68|
|DAL||Delta Air Lines, Inc.||$32.85|
Airline Stocks to Sell: American Airlines (AAL)
American Airlines (NASDAQ:AAL) stock has been in a correction mode with a downside of 9% in six months. AAL stock still remains among the top airline stocks to sell considering the macro-economic conditions and the company’s balance sheet.
American Airlines reported a liquidity buffer of $15.5 billion as of the first quarter. This will help the airline navigate the cash burn. However, as capacity utilization declines due to a potential recession, debt is likely to increase further. Higher fuel prices will also impact key margins.
The airline reported total debt of $37.9 billion in the first quarter of the year. This implies high debt servicing cost. If debt increases further, credit metrics will worsen. This will translate into downside for AAL stock.
Of course, the airline can deliver robust cash flows once industry conditions recover. The key focus will however be on deleveraging and further dilution of equity might be on the cards.
United Airlines (UAL)
United Airlines (NASDAQ:UAL) has also been sideways to lower in the recent quarters. The airline also faces the challenge of a stressed balance sheet at a time when macro-economic conditions are weak.
Recently, Argus lowered the rating for UAL stock to hold with expectations of impact on profitability due to cost pressure. If travel demand weakens significantly, the stock might face yet another downgrade.
To put things into perspective, United Airlines reported $37.8 billion in debt (including operating lease) as of the first quarter. For the same quarter, the company’s interest expense was $424 million.
Debt servicing cost is likely to remain a burden in the coming years. United Airlines reported $20 billion in liquidity for its first quarter. Therefore, navigating a renewed period of cash burn might not be a challenge. It will however worsen the company’s credit profile.
Even if I had to consider exposure to the airline industry, there are companies with a healthier balance sheet. JetBlue (NASDAQ:JBLU) is a good example. For United Airlines, equity holders are unlikely to benefit even when cash flows turn meaningfully positive. The focus will be on deleveraging.
Airline Stocks to Sell: Delta Air Lines (DAL)
Delta Air Lines (NYSE:DAL) is another airline stock to sell amidst industry headwinds. It seems that a forward price-earnings-ratio of 11 is attractive. However, weak industry sentiment is likely to take DAL stock lower. With the recent earnings miss, the stock sentiment is negative.
Similar to peers, the airline has a robust liquidity buffer of $12.8 billion. Survival is not a concern. However, the cost of survival is a stressed balance sheet, which is likely to worsen if there is a recession.
As of Q1 2019, Delta Air Lines reported $10.7 billion in debt and finance lease obligations. This has swelled to $25.6 billion as of the first quarter of this year. Debt will increase further due to the factors of cost pressure and recession.
Among the positives, the company’s unit revenue already exceeded 2019 levels in March 2022. The company’s unit profitability is already higher than the industry average. As compared to peers, the stock is a good investment option. However, it makes sense to wait for a better entry point. Additionally, fleet renewal will help in lowering overall cost.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.