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Don’t Be Too Quick to Book American Airlines in Your Portfolio

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Josh Enomoto
·5 min read
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Aside from the cruise ship industry, I can’t think of a worst-hit sector fundamentally than the air travel market. As the novel coronavirus began spreading its way around the world, American Airlines (NASDAQ:AAL) stock tumbled badly.

American Airlines plane on ramp in Chicago Airport.
American Airlines plane on ramp in Chicago Airport.

Source: GagliardiPhotography / Shutterstock.com

At one point, AAL stock was trading hands in single-digit territory, something that wasn’t seen since the aftermath of the Great Recession.

Still, what we’ve learned from that economic catastrophe, along with other incredibly disruptive events such as the 9/11 terror attack, is that time eventually heals all wounds. Now, it’s fair to point out that we’re still not out of the woods in terms of the Covid-19 pandemic. Nevertheless, cases are down substantially from their peak, while the vaccine rollout has been very encouraging for previously hard-hit investments like AAL stock.

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Indeed, American and its competition, such as United Airlines (NASDAQ:UAL) and Delta (NYSE:DAL), is experiencing a much-needed revival. For AAL stock specifically, shares are up nearly 40% on a year-to-date basis. And over the trailing six months, American’s equity unit is up almost 80%. It’s a similar tale for the other majors.

Multiple factors support the narrative that the worst is behind AAL stock. Primarily, the economy registered encouraging signs that, while not perfect, is building robust momentum. For instance, the March jobs report obliterated analysts’ expectations, with total nonfarm payroll employment rising by 916,000. With that figure, the unemployment rate is down to 6%.

Keep in mind that during the peak of the crisis, unemployment was at 14.8% (in April 2020).

The other massive catalyst is consumer sentiment. Not necessarily the index but rather, people are getting over their fears of flying during Covid. According to airport screening data, for the month so far (data up to April 13), passenger volume is down roughly 39% from pre-pandemic levels.

That’s a paradigm shift from where we were in April 2020. Yet recently, American Airlines shares have lost momentum. Why?

Not Everything About AAL Stock Is Rosy

Although the ramp-up in air passenger volume is a net positive all things considered, severe turbulence still stymies AAL stock. First, we may need to explore the idea that passenger volume improvement will be slow going over the next several months.

Let me just say that I don’t know for sure how the consumer will react. But according to Morning Consult, just under two in five adults feel comfortable going to a movie theater. Among the most comfortable is Generation Z. But at 49%, it raises the question about how tenuous this increased sentiment may be.

I don’t want to jinx anything. But when I see soft survey data like that, it reminds me that all it takes is one bad turn with Covid-19 for positive momentum to die back down. That was the warning shot presented by a Bloomberg report in late March, which stated that Covid cases were rising again.

I checked the latest data from the Centers for Disease Control and Prevention. Let’s just say that I’m not thrilled with the data and the prospects of further lockdowns.

Another point that I believe is relevant to AAL stock and the underlying industry is the social situation. I’ve made this argument before, but we need tourism dollars now more than ever. Don’t get me wrong – it’s wonderful that our economy is improving, at least on paper. But it has taken unprecedented monetary and fiscal support to get these metrics.

We need to look long and hard at total public debt as a percentage of GDP. Previously, it was hovering roughly around 103% on average. As of the fourth quarter of 2020, it’s up at 129%. That’s a staggering gap. Tourism dollars, though, are accretive for our economy.

The thing is, who would want to visit the U.S. right now with all its myriad problems and social crises? Frankly, I’m looking to leave rather than stay.

Improvements Need to Happen Much, Much Quicker

Analyzing enplanement data, I’m encouraged with what I’m seeing. Based on the numbers and extrapolating the general sentiment, it’s possible that once April is done and over with, we could be looking at an employment figure of 45 million.

That’s welcome news. But it’s dramatically below where we need to be. In 2019, we routinely saw seasonally adjusted monthly figures hit over 77 million.

And that’s reflected in the financial statements for companies like American Airlines. In this case, American generated revenue of $17.3 billion in 2020, down 62% from 2019. It’s not that the improvements aren’t happening because they are. Rather, we need to see massive, groundbreaking progress.

We’re just not there yet. And we don’t know when that improvement will occur. For this reason, I believe investors are shying away from AAL stock. Personally, you might do well following their lead.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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.

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