<p>The negative economic consequences of the COVID-19 outbreak are felt by many industries and equities, including the share price of American Airlines (NASDAQ: AAL). This year’s AAL share is down more than 51% while the S&P 500 index is lower than 18.6%.
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With last week’s approval of a major rescue for the aviation sector, investors are wondering how worried they should be about the future of travel and tourism stocks, especially for the airline’s shares.
Today I would like to discuss the segment and the AAL share in more detail so that you can make a better informed decision about your holdings.
We’ve had industrial rescues before
President Trump signed a $ 2.2 trillion economic rescue package into law on March 27 that includes more than $ 50 billion for commercial airlines, including $ 25 billion in direct grants.
CEO Doug Parker said the carrier could receive $ 12 billion in federal aid, although there are questions about what kind of terms grants and loans can come with.
Many investors will know that this is not the first time the federal government has come to the rescue of industries and businesses. For example, following the events of September 9, 2001, Congress approved the “Air Transportation Safety and System Stabilization Act” and approved a $ 15 billion rescue package for the aviation industry.
We had also witnessed the concept being too big to fail in the aftermath of the financial crisis of 2008/09, when several industries received decisive help from the government. However, there was widespread criticism at the time. The general public, many politicians and analysts felt that the rescue package had not done much for the average American at the time. In addition, many companies, including airlines, had used their extra money to repurchase shares and increase remuneration to business leaders.
On the other hand, the current rescue package aims to address a number of issues that are likely to help protect jobs for airline employees. In other words, it comes with several strings attached. The incentive package ”would prohibit the repurchase of shares and the distribution of shares for at least one year after the loans have been repaid. It also limits remuneration from management. ”
Goodbye to repurchase
According to a recently published article by Barron “from 2009 to 2018, 465 companies in the S&P 500 Index spent $ 4.3 trillion on share repurchases, equivalent to 52% of their total profits … In the aerospace industry, America, Delta, United and Southwest, like Fedex and UPS, spent a lot of $ 77 billion in repurchases (56% of profits) and $ 35 billion in dividends (25% of profits). ”
Now that the airlines will not be able to buy back their shares or offer dividends, it is quite difficult to make a long-term bullish fall for most of the airline’s shares.
At this time, the government is hopeful that these payments will help stabilize the country’s air transport system. Holders of AAL shares, as in other airlines, should, however, keep an eye on potential industry development in the coming weeks and months. This is a dynamic situation that can change quickly.
Cost against income imbalance
The finances of running an airline are quite complex. Overall, it is quite expensive to operate an airline. The business is capital intensive and large investments are required. From purchasing to maintaining hundreds of plans, management must plan quarters ahead.
At the end of the day, like all other companies, airlines like AAL need revenue to cover operating costs and become profitable. The industry’s two largest operating costs are fuel and labor.
Sources of operating revenues, for example for American Airlines, include passengers, cargo, over baggage and certain other transportation-related revenues.
Analysts highlight the importance of economic activity such as GDP levels for air traffic growth and profit levels. They also see the industry as cyclical. Cyclicity would mean that the AAL share would rise when the economy grows and fall when the economy slows down.
Fewer passengers and fewer flights lead to reduced revenues and profits for the airlines’ companies, which puts pressure on their share prices. In addition, the narrow margins that airlines operate can be worrying.
Therefore, if you think we may be heading for an economic downturn, you may want to review your exposure to AAL stocks.
Price action means more volatility going forward
The airline’s shares have tumbled as fears of coronavirus continue to ripple through the markets. And the latest headlines have not been happy to read for investors in American Airlines.
So far in March, the AAL share is down over 44%, which means that the shares are now deep in a bear market. The price range of 52 weeks has been $ 35.24 (April 15, 2019) and $ 10.01 (March 23, 2020).
If you are an investor who also pays attention to technical charts, short-term pricing measures would call for caution. The AAL share price is likely to be volatile with a downward bias.
Most of the airlines’ shares had not participated in the broader stock market rally that we witnessed in 2019 or early 2020, either. During the 12 months, the AAL share price has instead fallen by about 55%.
From a technical chart perspective, it is likely that the AAL share price can once again test the latest low price of around $ 10. The company is expected to report Q1 results during the last week of April. If you are not yet a shareholder, you may first want to analyze the quarterly results at that time.
Investor Takeaway on AAL share
The safety and stability of the country’s commercial aviation system is crucial. Despite the much-needed rescue package, not all airlines may be able to survive a major shock like the one we are now witnessing.
Until we have more clarity about the global fight against the virus, there will probably be more turbulence in the future for the airlines’ shares as AAL shares.
Buying when the markets are in free fall requires courage. After all, so many news headlines are driven by pretty awful predictions. But if you liked a certain stock several weeks ago for basic basic reasons, you would probably want it more when the price is lower.
Many analysts really believe that the recent crash gives investors a buying opportunity as markets tend to bounce back, usually in a few months. Still, shares in airlines may go even lower after you buy into a company like American Airlines.
Therefore, decisions about your portfolio holdings, especially in sectors that are directly affected by the economic consequences of the global pandemic, should be made within your own risk / return profile. You may also want to talk to a financial advisor about your own circumstances.
I personally would not be willing to buy the airline’s shares at this time.
Tezcan Gecgil has worked in investment management for over two decades in the United States and the United Kingdom. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) degree. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially likes to cancel weekly calls for income generation. At the time of writing, Tezcan Gecgil had no position in any of the above securities.