The airline industry and American Airlines stock have suffered shocks from both the coronavirus crisis and the Boeing (BA) 737 Max grounding. Is AAL stock a good buy as the Covid-19 vaccine rollout starts and the Boeing 737 Max takes to the air again? For the answer, take a look at American’s earnings and stock chart.
AAL Stock Fundamental Analysis
Before the sharp decline in travel amid Covid-19, Fort Worth, Texas-based American Airlines (AAL) and its regional carrier, American Eagle, operated 700 flights per day to nearly 350 destinations in more than 50 countries, according to the company.
Even before the latest industry slump, American Airlines earnings and revenue had been weak for some time. The IBD Stock Checkup tool shows that over the last three years, American Airlines earnings per share were flat on an annual basis, with revenue falling at an average of 9%. CAN SLIM investing recommends investors look for bottom-line growth of 25% or more.
Then global travel demand collapsed during the coronavirus crisis. American and other carriers slashed flight schedules to just a fraction of pre-pandemic levels and don’t see a quick return to normal.
American had a bullish summer travel schedule, but while revenue in May and June was up from March and April, demand fell again in July as Covid-19 cases increased and travel restrictions, both domestically and internationally, were put in place.
In its third-quarter report in October, American Airlines swung to a loss of $5.54 a share as revenue plunged 73% to $3.17 billion. But both beat Wall Street estimates.
Daily cash burn fell to $44 million in Q3 from $58 million in Q2. The company expects Q4 daily cash burn of $25 million to $30 million.
American also sees more operating efficiencies from the permanent retirement of its Airbus (EADSY) A330s. That will reduce its mainline fleet to only four aircraft types, and management sees crew, maintenance and schedule efficiencies being permanent.
The Centers for Disease Control and Prevention warned Americans against traveling for Christmas as Covid-19 cases surged ahead of the holiday. But many Americans still planned to travel, and American sees capacity increasing over the holidays. Still, the carrier expects Q4 capacity to be down more than 50% vs. a year earlier, with long-haul international capacity down about 75%.
Coronavirus vaccines started to ship in December, but widespread availability isn’t expected until spring or summer 2021 with travel demand not fully recovering for years.
Moody’s Investors Service reiterated a negative outlook on the global airline sector, citing suppressed demand due to rising infection rates and large operating losses that will likely continue into 2022.
The International Air Transport Association expects the air travel sector to lose $118.5 billion in 2020, far worse than its June forecast for a loss of $84.3 billion. Losses are expected to total $38.7 billion in 2021, more than double the prior view for a loss of $15.8 billion. IATA doesn’t see passenger traffic rebounding to 2019 levels until 2024, a year later than previous outlooks.
Lucrative business travel may be depressed long term, as the work-from-home and videoconferencing trends aren’t going away.
In turn, airlines are competing harder for leisure travelers.
United Airlines (UAL) announced Aug. 30 it would permanently scrap change fees for domestic flights as it looks to boost bookings amid the coronavirus pandemic. The very next day, American and Delta Air Lines (DAL) made similar moves.
Change fees are big business for airlines. The Department of Transportation said U.S. carriers saw $2.8 billion in ticket-change and cancellation fees in 2019.
AAL Stock Technical Analysis
AAL stock is in a long-term downtrend, and shares hit their lowest level since 2013 earlier this year, according to MarketSmith analysis. The chart is messy despite shares breaking through resistance at the 15 price level. There could be a big bottoming pattern with a 22.90 entry that investors could watch for in the future.
American Airlines stock had been underneath its 40-week moving average since April 2018, but it rebounded above the 40-week and 200-day lines in November following positive coronavirus vaccine data.
The relative strength line, which compares a stock’s price action with that of the S&P 500 overall, is falling, recently hitting the lowest point since August 2013. The RS line began to spike in November following earnings and Covid-19 vaccine news.
AAL stock still has a weak RS Rating of 15. The best stocks usually have a Relative Strength Rating of 80 or higher before they break out to meaningful gains.
Still, shares have an Accumulation/Distribution rating of B+, indicating institutional investors are buying up American Airlines stock. That’s despite high-profile investors like Warren Buffett selling off his stakes in airline stocks recently soon after loading up on them, as air travel collapsed.
Covid-19, Boeing 737 Max Hit American Airlines Stock
Even before the pandemic hit, the global grounding of the Boeing 737 Max weighed on AAL stock. The 737 Max has been out of service since a fatal Ethiopian Airlines crash in March 2019, following a similar deadly crash with Indonesia’s Lion Air in October 2018. Officials have blamed the Maneuvering Characteristics Augmentation System for the crashes, which together killed 346 people.
On Nov. 18., the Federal Aviation Administration approved the 737 Max’s return to service.
American put the Boeing 737 Max back on its flight schedule and said in October that it would offer daily Boeing 737 Max flight between Miami and New York from Dec. 29 to Jan. 4. Passengers started booking the flight on Oct. 24.
Despite the lifted grounding, American Air management plans to defer Boeing 737 Max deliveries. Eight planes previously set for delivery in 2021 and 10 set for 2022 will now come as late as 2024, American said Oct. 22.
Pilots have asked American for compensation for lost pay due to the lengthy grounding. Southwest Airlines (LUV) CEO Gary Kelly promised employees that he would share any reimbursement the company gets from Boeing.
Meanwhile, airline stocks including AAL stock also collapsed as travel demand plummeted amid the coronavirus pandemic. The federal government had to step in with bailouts.
American Airlines reached an agreement with the federal government on April 15 for a $5.8 billion bailout to help keep its employees on the payroll. But that wasn’t enough.
To help save cash, the carrier said that over 41,000 employees have opted for early retirement, a reduced work schedule, or partially paid leave. American and United furloughed more than 32,000 workers on Oct. 1 after Congress failed to secure an extension to the coronavirus aid package.
After stimulus talks stalled before the election, lawmakers appear to be closing in on a new relief package that would include $17 billion in fresh airline aid.
AAL Stock Is Not A Buy
Shares have been recovering somewhat over the past few weeks, but are down sharply from pre-pandemic levels. Business has cratered due to the coronavirus pandemic, but wasn’t doing great before then in the notoriously cyclical industry. Even after the pandemic eases, the travel sector isn’t expected to rebound quickly as different markets come back sooner than others, with jurisdictions placing different restrictions on the industry.
The relative strength line for AAL stock is off its lows but remains depressed historically. The 50-day line has halted its nose dive but has a long way to go.
Bottom line: American Airlines stock isn’t a buy right now. It suffers from weak technicals and fundamentals along with devastated travel demand.
Follow Gillian Rich on Twitter @IBD_GRich for aviation news and more.
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