Over the previous month, the airline business has been hit laborious by the unfold of the novel coronavirus. The demand for air journey disappeared virtually in a single day, and the entire main airways are feeling the results, together with American Airways (NASDAQ:AAL). AAL inventory is down greater than 19% within the final month.
Issues have been trying up for the business since Congress handed the Coronavirus Help, Aid, and Financial Safety (CARES) Act, which appropriates $50 billion in aid to the airline business and can seemingly assist scale back layoffs and provides corporations a little bit of short-term respiration room.
This stimulus cash ought to assist maintain corporations like American Airways afloat in the interim, however the AAL inventory will nonetheless wrestle if demand for journey doesn’t resume rapidly. And even with a $50 billion airline business bailout, American Airways is probably not an awesome funding going ahead.
Listed below are three issues you need to think about earlier than investing in AAL inventory.
Carrying a Heavy Debt Load
American Airways has extra debt than every other air provider. By the top of 2019, its debt had reached a staggering $33.four billion.
The truth that AAL inventory already had this sort of debt load, earlier than the worldwide well being disaster, is problematic. Even with the stimulus invoice and different cost-cutting measures, this sort of debt provides the corporate lots much less flexibility.
American not too long ago introduced that it has entry to $2.73 billion from three totally different strains of revolving credit score. This means that the corporate will seemingly must tackle much more debt to outlive the oncoming recession.
Scrambling to Preserve Money
American Airways has taken steps to preserve its money and simplify operations. The corporate introduced its plans to retire lots of its jets, together with 34 Boeing 757s, 17 Boeing 767s, 20 Embraer E190s, and plenty of others. In complete, the corporate plans to take 156 jets out of service.
The corporate has additionally drastically in the reduction of on its summer season journey schedule to accommodate the decline in demand. AAL minimize its worldwide journey schedule by 60% and is suspending new routes it had deliberate for 2020.
Price-cutting Will Solely Assist AAL Inventory so A lot
In the end, cost-cutting measures will solely assist American Airways a lot. Till demand returns to the airline business, these efforts will solely sluggish the corporate’s losses. That is seemingly why the corporate is taken into account a reasonable Promote on Wall Avenue and was not too long ago downgraded by Goldman Sachs.
AAL inventory is down nearly 60% 12 months to this point, faring a bit worse than friends, as seen within the close to 55% decline for the U.S. World Jets ETF (NYSEArca:JETS), the exchange-traded fund that has American Airways within the quantity two spot at 12.37% of its 34 holdings.
To make certain, this inventory rises and falls on sentiment, gaining barely in current days as traders had been feeling extra upbeat concerning the inventory after information handed that well being situations are enhancing in Europe and New York.
This might point out that airline journey might start enhancing within the coming months. Nonetheless, it is going to nonetheless take the business a very long time to get well from the pandemic. So regardless of the low worth, it’s most likely finest to keep away from AAL inventory in the interim.
Jamie Johnson is a private finance freelance author and has been writing for InvestorPlace since mid-2019. She writes for a lot of different well-known monetary websites, together with Credit score Karma, Quicken Loans and Fintech Zoom. As of this writing, Jamie Johnson didn’t maintain a place in any of the aforementioned securities.