American Airlines Might Be Doomed, For Good – Idaho Reporter

AAL, National

American Airlines Might Be Doomed, For Good

American Airlines (NASDAQ:AAL), one of the USA’s major legacy carriers, might not be able to stage a comeback from the downturn of the sector caused by the coronavirus pandemic.

The earnings season for this year’s aviation sector was painted red due to the literal decimation of demand as lockdowns and rising infections took the nation by storm.

Of these, American Airlines posted a Q1 loss of $2.2 billion and 19% lower revenue(Yahoo Finance). These numbers look even worse as the bulk of the shock from the pandemic was felt at only the end of the quarter with passenger traffic down 95%. Hence, all airlines are prepared for an even harsher Q2.

The American Airlines stock closed 64% down YTD on Friday, and opened another 10% down today after Warren Buffett’s Berkshire Hathaway announced it’s exit from the aviation sector as a whole at its earnings report over the weekend.

As a result of these extreme conditions, the US Government provided the aviation sector with stimulus packages to prevent insolvency and job cuts. As a part of this stimulus, American Airlines received $5.8 billion to maintain liquidity and cover salaries, which it fears might not be enough as it prepared to apply for another $4.8 billion loan from the Treasury. (Nasdaq)

Given the current condition of the sector and it’s future prospects, American Airlines could be backed into a corner. Given that a vaccine is expected by the end of this year at best and it will then take more time to be administered widely, airlines will have to operate at reduced capacities to soothe social distancing concerns.

Is AAL stock a good buy?

Airlines expect that they will have to operate leaving the middle row empty, or at 66% capacity, which has a significant effect in an industry as capital intensive as aviation. Late last week, a Washington post visualization of how a single cough can spread through the entire cabin of an aircraft went viral on twitter, the crux is that a virus is much smaller than bacteria and can easily pass through air-conditioning filters of an aircraft(Washington Post).

Investors are also panicking over concerns that a looming recession will significantly reduce disposable incomes and further reduce demand, a concern shared by Berkshire Hathaway at their earnings call. 

Will American Airlines stock go up?

Other than the concerns above, American Airlines has a severe liquidity problem. In Q1 the company burned through $1.013 billion, after the CARES package and raising $2 billion, however, given the present scenario, the company expects cash-burn of $70 million a day in Q2, or $6.37 billion.

Given that the company ended Q1 with $6.8 billion of liquidity, a cash burn of another $6.37 billion will almost drain its finances and make it impossible to survive, making it a bad investment. AAL stock probably wont go up any time soon unless it raises more debt from the government or bond market, the latter likely being an extremely expensive option for the company due to the risks involved.

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