<p>American Airlines (NASDAQ: AAL) shares will fall over 65% by 2020. But frankly, all airlines in the world are facing the same issue. The demand for their services is basically zero. And it will happen in the foreseeable future. This is not the title story for AAL shares.
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By no means do I want to convey that I recommend for the mother to be inactive. But like other “Black Swan” events, it has put the entire industry on hold. And since all airlines have the same short-term consequences, it can be easy to believe that each airline will benefit from a resurgence in consumer demand.
But the real problem for AAL stocks is math. Unlike many of its counterparts, the company did not show robust growth before the new coronavirus pandemic. And it was in the midst of an unparalleled economic expansion.
The wise investor knows that the industry will return. And that’s why you need to look at your company’s health before the outbreak. These companies will be in the best position to recover quickly. Unfortunately, Americans cannot make that statement.
The Americans’ balance sheet was already ill
American Airlines entered 2020 with adjusted net debt of $ 29.6 billion. That was 65% of the company’s revenue from 2019. Of the major airlines, including Delta Air Lines (NYSE: DAL) and United Airlines (NASDAQ: UAL), American is the least able to afford to go further into debt. Still, that’s exactly what’s likely to happen. And that’s why you need to think twice before investing in AAL shares.
Partly thanks to lobbying by Airlines for America, an industry trading group, AAL is likely to receive a portion of the $ 50 billion loan package requested by the US government. And, as InvestorPlaces Tom Taulli points out, American has friends in the right places. Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) owns a 10% stake in the company and is unlikely to let it fail.
But it is clear that voters are not in the mood for rescue. If American Airlines receives a loan, it is expected to repay it. However, it is in the worst position to do so. For an investor, this means that it may take AAL shares longer to make a profit than airlines with less pre-pandemic debt.
American has responded to criticism, pointing out that it has $ 7.3 billion in liquidity, more than any other airline in the world. However, that cash is more than offset by the company’s debt burden.
The boldness of hardness
Much has been done about our country’s preparedness for the pandemic. For some reason, American Airlines made a tactical mistake in that regard. In early March, the company provided guidance that seriously underestimated the lack of demand for its flights. On March 10, CEO Doug Parker stated that the airline would reduce domestic capacity by 7.5% in April and international flights by at least 10% during the summer.
But less than a week later, the company was forced to provide a revised estimate. At that time, AAL announced that it would introduce a 30% reduction in domestic flights and a 75% reduction in international flights in April. The airline also said that these reductions are likely to be deeper in May.
Investors please do not take downward audits to begin with. But American was in short supply with its history of share buybacks that anger investors and congressional leaders. From July 2014 through 2019, American purchased $ 12.4 billion of its own inventory.
Right now, the AAL share is a difficult pass. It has to be. This is not an alarmist statement that indicates that American Airlines will become insolvent. The airline will be ready and able to fly passengers after the travel guidelines have been repealed.
But when it will be and how soon consumers will return are unanswerable questions, at least for the time being. Our world’s response to the virus is a real-time scientific experiment. Our world’s response to the declining threat will be the subject of doctoral dissertations for decades.
InvestorPlace contributor Nicolas Chahine claims that American Airlines may be too much of a bargain to handle at this price. He may be right, but if you are an investor looking at AAL stocks, you need to know the consumer’s response before you consider investing.
Based on equal conditions, there are other airline stocks that are more attractive.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. At the time of writing, Chris Markoch holds no position in any of the above securities.