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Coronavirus Woes Weigh on American Airlines (AAL): Time to Dump?

Zacks Equity Research
·3 min read

American Airlines AAL is taking a significant hit from the coronavirus pandemic as  air-travel demand is at extremely low levels.

This sharp drop in air travel is hurting passenger revenues, which comprise majority of American Airlines’ top line. The carrier incurred a loss in each of the first three quarters of 2020, mainly due to the 64.2% plunge in passenger revenues in the first nine months of 2020. To match the extremely tepid travel-demand scenario, American Airlines is trimming its capacity. The carrier expects system capacity for the December quarter to nosedive more than 50% year over year. Long-haul international capacity is estimated to be down roughly 75% in the final quarter of 2020.

Following the expiration of the CARES Act on Sep 30, American Airlines went ahead with its earlier decision to retrench 19,000 employees. With uncertainty still looming large on a second round of federal aid, possibility of further job-cuts cannot be ruled out. Moreover, the carrier’s financial position is not strong.

The carrier’s total debt-to-total capital ratio stood at 1.2 at the end of the September quarter, much higher than its reading of 1.11 at the end of the June quarter. The reading was 1 at the end of 2019. A higher ratio implies that a company is severely leveraged with a greater risk of insolvency. Battling coronavirus-induced suppressed air-travel demand, the airline agreed to borrow up to $5,477 million from the United States Department of the Treasury. This hefty loan might worsen its debt profile.

The recent spike in coronavirus cases in some parts of the United States indicates that passenger revenues are likely to be low in the December quarter as well due to weak demand.

Primarily due to coronavirus-related woes, shares of American Airlines have plunged 10.4% in the past three months against its industry’s 8.4% growth.

The pessimism surrounding the stock is evident from the Zacks Consensus Estimate for 2020 bottom line being currently pegged at a loss of $19.95, which has widened from $18.92 60 days ago.In view of these negatives, we believe investors should discard the currently Zacks Rank #4 (Sell) American Airlines stock from their portfolios now.

Stocks to Consider

Investors interested in the broader Zacks Transportation sector may consider the likes of United Parcel Service UPS, Expeditors International of Washington EXPD and GATX Corporation GATX, each carrying a Zacks Rank #2 (Buy), presently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of UPS, Expeditors and GATX have gained more than 12%, 3% and 15% in the past three months, respectively.

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Zacks Investment Research