3 reasons to think twice before investing in American Airlines stock

<p>In the last month, the aviation industry has been hit hard by the spread of the new coronavirus. Demand for air travel virtually disappeared overnight and all major airlines are feeling the effects, including American Airlines (NASDAQ: AAL). The AAL share has fallen more than 19% in the past month.

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Things have been looking up for the industry since Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which connects $ 50 billion in relief to the aviation industry and is likely to help reduce layoffs and give companies some short-term respite.

This stimulus money should help keep companies like American Airlines afloat at present, but the AAL share will still struggle if travel demand does not resume quickly. And even with a $ 50 billion bailout for the aviation industry, American Airlines may not be a good investment in the future.

Here are three things to keep in mind before investing in AAL stocks.

Carry a heavy debt load

American Airlines has more debt than any other airline. By the end of 2019, its debt had reached a staggering $ 33.4 billion.

The fact that AAL shares already had such a debt burden before the global health crisis is problematic. Even with the stimulus bill and other cost-saving measures, this type of debt gives the company much less flexibility.

The US recently announced that it has access to $ 2.73 billion from three different lines of revolving credit. This indicates that the company will probably have to take on even more debt to survive the coming recession.

Distortion to save money

American Airlines has taken steps to save its cash and simplify operations. The company announced its plans to retire many of its jets, including 34 Boeing 757s, 17 Boeing 767s, 20 Embraer E190s and many others. In total, the company plans to take 156 jets out of service.

The company has also drastically cut its summer travel plan to meet the reduced demand. AAL reduced its international travel schedule by 60% and postponed new routes they had planned for 2020.

Cost savings only help the AAL share so much

In the end, cost-saving measures will only help American Airlines so much. Before demand returns to the aviation industry, these efforts will only slow down the company’s losses. This is probably why the company is considered a moderate sale on Wall Street and was recently downgraded by Goldman Sachs.

The AAL share has fallen almost 60% from year to year and is slightly worse than comparable, as evidenced by the almost 55% decline for the US Global Jets ETF (NYSEArca: JETS), the listed fund that has American Airlines in number two placed on 12.37% of its 34 holdings.

To be sure, this stock is rising and falling on sentiment and has increased slightly in recent days as investors felt more optimistic about the stock after the news broke that health conditions were improving in Europe and New York.

This may indicate that airlines’ travel may begin to improve in the coming months. However, it will still take the industry a long time to recover from the pandemic. So despite the low price, it is probably best to avoid AAL shares at the moment.

Jamie Johnson is a freelance writer for personal finance and has been writing for InvestorPlace since mid-2019. She writes for a number of other well-known financial websites, including Credit Karma, Quicken Loans and Bankrate. At the time of writing, Jamie Johnson had no position in any of the above securities.