Boeing (NYSE:BA) has been making headlines for all the wrong reasons over the years, first with the 737 Max jetliner fatalities and subsequent mishandling of the issue, and most recently, the begging for a government bailout. The company added one more, declaring that a major U.S. airliner could go out of business this year. And many investors believe this to be American Airlines (NASDAQ:AAL), casting a dark cloud on AAL stock.
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To be clear, Boeing CEO Dave Calhoun never mentioned who he was thinking about specifically during an interview with CNBC. But to those reading between the lines, American Airlines looks to have received the dubious honor. As you know, the broader travel industry has been a mess, impacting every corner of the sector. Even as most states have forged a path toward reopening, travelers largely remain rooted at home.
Of course, in any fallout, the weakest components are the first to suffer. In this case, several analysts have pointed the spotlight at AAL stock. Let’s be real – airliners weren’t exactly the most robust investment class prior to the novel coronavirus pandemic. But now, the crisis has exposed every vulnerability.
Fundamentally, American Airlines is burning cash at an unsustainable rate. In my opinion, you can easily use hyperbolic terms here. In its most recent first-quarter earnings report, AAL suffered a net income loss of $2.24 billion. Its balance sheet is now in the red, suffering a loss of $2.64 billion.
Again, rivals such as United Airlines (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL) don’t necessarily inspire the most confidence. But neither organization has a negative balance sheet. Thus, it’s likely that AAL stock would be the odd man out.
The Loss of AAL Stock Would Only Be a Pyrrhic Victory
In a cynical sense, should American Airlines implode, it would ordinarily represent an opportunity for the other, relatively well-heeled airliners. Back in the early 1990s, for instance, the nostalgic airline brand Pan Am found itself in federal bankruptcy court. After a fierce battle, which included United, American and defunct companies Trans World Airlines and Northwest Airlines, the court granted Delta rights to Pan Am’s transatlantic service.
Essentially, Pan Am’s assets were incredibly valuable to almost every major airliner because they could pick up pieces of the once iconic firm for pennies on the dollar. But what makes this present crisis unique is that few will be eager to adopt such a speculative growth strategy.
In other words, it doesn’t really matter whether AAL stock fades into the darkness. What we really should be concerned about is how many of the airliners will still be flying.
I’m almost tempted to say that the airliner industry represents one of the greatest shorting opportunities ever. That’s because a sharp disconnect still exists between the industry’s market value and what’s really over the horizon.
According to Boeing chief exec Calhoun, “Traffic levels will not be back to 100%. They won’t even be back to 25% [by September]… Maybe by the end of the year we approach 50%. So there will definitely be adjustments that will be have to be made on the part of the airlines.”
If that’s the case, AAL stock is not the only stock we should be worried about. Before the coronavirus disrupted everything, industry experts forecasted that global air traffic volumes, though positive, would decline relative to the highs of 2017.
Part of the reason is sluggish economic growth which has now turned into a disaster.
Deflationary Environment to Hurt All Players
If that wasn’t enough to get you airsick, consider that the consumer is probably not ready to fly. I’m not just talking about the obvious health implications. Rather, the financial situation for millions of Americans simply do not justify travel and vacationing.
As you’ve heard, the latest jobless claims number neared three million initial filings. Since the crisis began, the total number of people filing for unemployment benefits have totaled over 36 million. It’s an absolutely stupid figure that even hardened analysts cannot comprehend.
Not surprisingly, 40% of Americans who have been fortunate enough to receive their coronavirus stimulus checks have chosen to save their funds. Personally, it’s the wisest decision you could make. But on a collective level, this is exactly what the government didn’t want.
After all, our economy is mostly driven by consumption. What happens when people don’t consume?
It’s a similar line of inquiry against AAL stock. Yes, American Airlines might fail. But how long can everyone else last if nobody wants to fly?
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
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