It’s no secret that airline equities are grounded this year and American Airlines (NASDAQ:AAL) is definitely more rule than exception to that trend. AAL stock is lower by almost 55% in 2020.
That’s far worse than the 43% shed by the U.S. Global Jets ETF (NYSEARCA:JETS), a relevant comparison because it underscores not only the weakness in AAL stock, but the potential advantages of betting on an airline recovery in basket form, not via individual names.
Muddying the waters for American and other carriers is the still-weak domestic economy. Weekly jobless claims checked in at 884,000 for the week ending Sept. 5, rising for a fourth consecutive week and easily topping economists’ forecasts calling for 840,000 claims.
Accounting for nearly 839,000 workers filing under the Pandemic Unemployment Assistance Act, the true claims number was 1.69 million.
The detriment to airlines is twofold. First, a rising number of jobless benefits seekers decreases the pool of potential leisure travelers, a relevant concern with the holiday travel season fast-approaching. Second, with unemployment high and a timeline for a Covid-19 vaccine still murky, conventions and business travel are grinding to a halt, burdening airlines in the process.
Other Woes for AAL Stock
Those two factors don’t encompass all of the airline industry’s problems. After all, these are still financially flimsy companies, broadly speaking, with Texas-based American being among the weakest. It’s no wonder CEO recently lauded the idea of another round taxpayer largess for the industry.
Of course he did.
American is considering going to the Treasury Department for more money. American Chief Financial Officer Derek Kerr confirmed as much at a recent industry conference, noting that some rivals may not use all of the assistance from Uncle Sam they initially received. With $40 billion in debt – more than five times its market capitalization – American is eager for more financial assistance.
Even if American procures additional funds and it probably will, the specter of a company with an enterprise value of about $46.50 billion, $40 billion of which is derived from debt, in ailing industry with a multi-year timeline to recovery shouldn’t be appealing for most investors.
As for a fourth-quarter recovery, investors shouldn’t hold their collective breaths. American expects traffic to be down 50% year-over-year following a 60% drop in the current quarter.
Some analysts believe inconsistencies in how American is recently shuffling around and scrapping routes indicates the fourth-quarter capacity decline could be worse than expected. Others forecast the carrier’s debt burden ballooning to $44 billion by the end of the September quarter against just $13 billion in cash.
It may be only slight hyperbole to say the best traits about American at this point are that it’s taking steps to rein in costs and that its nearest debt maturity arrives in June 2022.
Rock, Hard Place Aren’t Going Away
In a normal operating environment, investors may be willing to give American’s debt burden a pass, but not in this climate.
These days, that mountain of debt coupled with needing government assistance weigh on the bull thesis for AAL stock. That weight grows heavier when acknowledging it’s going to be 2022 or 2023 before business traffic, previously a staple of American’s success, returns in earnest.
In the meantime, the carrier’s basic economy service can get new, younger travels in the door, but not to a degree high enough to augment lost corporate and premium travelers that paid up for comfort and acquisition of frequent flier miles.
For investors insisting on using travel and leisure equities as plays on Covid-19 recovery, a higher quality airline or casino operators are preferable to American over the near-term.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.