Shahid is a business graduate, with a knack for writing on business and finance topics.

2020-08-10 11:04

The Coronavirus pandemic has severely battered the airline stocks, and American Airlines (NASDAQ: AAL) is no exception. Its revenue saw an 85% decline to $1.62 billion. Moreover, it registered a per-share loss of $7.82 in the second quarter versus a per-share profit of $1.82 in the same quarter last year. The analysts expected a loss of $6.41 per share. But the pandemic affected the whole airline industry; the revenue of all the major airlines declined by 80% in the second quarter, compared with the same quarter last year.

American Airlines’ stock has been plummeting since the start of the calendar year when it started at $29.09. As of Friday, 7 August 2020, the stock closed on $13.03, cumulatively losing around 55% YTD. Its stock, however, rallied 3.8% on Friday’s close amid speculations that the government might loosen international travel restrictions and provide another stimulus worth $25 billion to the airline. The amount will be spent on employees’ payroll.

Seeing no respite for American Airlines, analysts expect further deterioration in its third-quarter results because of the liquidity and debt issues surrounding the company. Moreover, analysts believe that flight schedules will not attain pre-pandemic levels until 2022, at least.

The Risks

With a colossal $40 billion debt, which is expected to rise to $50 billion by the end of the year, American Airlines is struggling to stay liquid. To add to its miseries, the company burns a whopping $30 million cash each day, which, according to the company, was averaging $100 million per day in April. Many analysts forecast that it will file for Chapter 11 bankruptcy sooner or later. While the company has managed to acquire liquidity of $16.2 billion, the future looks challenging. Unless it reduces its cash burn levels, it will continue to face liquidity issues.

Chairman and CEO of American Airlines, Doug Parker, said:

“We have moved swiftly to improve our liquidity, conserve cash and ensure customers are safe when they travel”

Airline stocks have all tumbled following the coronavirus lockdown and international travel restrictions. While it might be tempting for some contrarian investors to buy American considering the stock has lost more than 50% of its value YTD, it is recommended to avoid buying it. The fundamentals, technicals, and weak demand outlook, as well as the risks surrounding the company, are all red flags.