<p>Boeing (NYSE: BA) has made headlines for all the wrong reasons over the years, first with 737 Max dead aircraft and then incorrect handling of the issue, and most recently begging for a government rescue. The company added another and explained that a large American aircraft could go out of service this year. And many investors believe that this is American Airlines (NASDAQ: AAL) throwing a dark cloud on the AAL stock.
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To be clear, Boeing’s CEO Dave Calhoun never mentioned who he was thinking about specifically during an interview with CNBC. But to those who read between the lines, American Airlines seems to have received the dubious honor. As you know, the broader travel industry has been a mess and affected all corners of the industry. Although most states have created a path to reopening, travelers largely remain rooted at home.
Of course, in any fallout, the weakest components are the first to suffer. In this case, several analysts have pointed to the AAL share. Let’s be right – aircraft were not exactly the most robust investment class before the new coronavirus pandemic. But now the crisis has exposed every vulnerability.
Basically, American Airlines burns cash at an unsustainable rate. In my opinion, you can easily use hyperbolic terms here. In its most recent first-quarter earnings report, AAL suffered a net loss of $ 2.24 billion. Its balance sheet is now in the red and suffering a loss of $ 2.64 billion.
Again, rivals such as United Airlines (NASDAQ: UAL) and Delta Air Lines (NYSE: DAL) do not necessarily inspire the most confidence. But no organization has a negative balance sheet. Thus, it is likely that AAL shares would be the odd man out there.
The loss of AAL stock would only be a Pyrrhic victory
In a cynical sense, should American Airlines implode, it would usually be an opportunity for the other, relatively well-known aircraft. Back in the early 1990s, for example, the nostalgic aviation brand Pan Am was in a federal bankruptcy court. After a fierce battle, involving United, American and disbanded companies Trans World Airlines and Northwest Airlines, the court granted Delta rights to Pan Am’s transatlantic service.
In essence, Pan Am’s assets were extremely valuable to almost every major aircraft because they could pick up pieces of the once iconic company for a penny on the dollar. But what makes the current crisis unique is that few will be eager to adopt such a speculative growth strategy.
In other words, it does not matter if the AAL stock disappears in the dark. What we really need to worry about is how many planes will still be flying.
I am almost tempted to say that the aviation industry represents one of the biggest short-circuit opportunities ever. This is because there is still a sharp link between the market value of the industry and what is really on the horizon.
According to Boeing’s manager, Calhoun, “traffic levels will not be back to 100%. They do not even return to 25% [by September]… Maybe at the end of the year we are approaching 50%. So there will definitely be adjustments that will need to be made by the airlines. ”
If so, AAL shares are not the only stock we should worry about. Before the coronavirus disrupted everything, industry experts predicted that global air traffic volumes, although positive, would decline relative to 2017.
Part of the reason is sluggish economic growth which has now turned into a disaster.
Deflating environment to harm all players
If that was not enough to make you sick, keep in mind that the consumer is probably not ready to fly. I’m not just talking about the obvious health effects. Rather, the economic situation of millions of Americans simply does not justify travel and vacation.
As you have heard, the latest number of unemployed claims approached three million initial applications. Since the crisis began, the total number of people applying for unemployment benefits has been over 36 million. It is a completely stupid figure that even hardened analysts cannot understand.
Not surprisingly, 40% of Americans who have been lucky enough to receive their coronavirus stimulation checks have chosen to save their money. Personally, it is the wisest decision you can make. But at the collective level, that is exactly what the government did not want.
After all, our economy is driven mostly by consumption. What happens when people do not consume?
This is a similar request for AAL shares. Yes, American Airlines may fail. But how long can everyone else last if no one wants to fly?
Josh Enomoto, a former senior business analyst at Sony Electronics, has helped broker larger contracts with Fortune Global 500 companies. In recent years, he has delivered unique, critical insights for the investment markets, as well as for various other industries, including law, construction management and healthcare. At the time of writing, he had no position in any of the above-mentioned securities.