Shares of American Airlines Group (NASDAQ: AAL) fell more than 5% on Wednesday, sinking to a multiyear low in the process. The airlines tend to trade in tandem, based on the price of oil and other factors, but American's fall Wednesday was much more severe than the drop in the share price of rivals including Southwest Airlines, Delta Air Lines, and United Airlines Holdings.
There were some headlines out today concerning American's ongoing labor issues, but the airline's issues with its mechanics are well-known and likely not responsible for the sell-off. Investors instead seem to be worried about the threat of a recession and wondering whether American will be able to fly through the potential turbulence on the horizon.
The airlines, after a series of bankruptcy reoganizations earlier in the decade, have made progress in moving away from the boom-and-bust cycle that once haunted the industry and caused huge losses during recessions. The businesses have so improved that American CEO Doug Parker famously said in 2017, "I don't think we're ever going to lose money again," predicting profits in good times and in bad.
American shares are stuck on the ground. Image source: American Airlines.
That quote is front of mind today as the yield on a 10-year Treasury bond fell below the two-year rate, creating a so-called inverted yield curve that many investors believe is a signal that a recession is imminent. Whether a downturn is around the corner remains to be seen, but investors on Wednesday voted with their feet that American appears to be the major airline most vulnerable in a slowing economy.
The reason it's vulnerable, in a word, is debt. American has more than $34 billion in debt, compared to United's $20 billion, Delta's $17.4 billion, and Southwest's $4.6 billion. The good news for American is with the yield curve flat, the interest expense on that debt will remain low. The bad news is that should demand falter, investors are worried that American could struggle to manage its borrowings in a worst-case scenario.
American has other potential issues heading into a possible recession, including a stubbornly high cost structure, pension liabilities, and continued labor unrest. It's also one of the airlines dealing with scheduling disruptions due to Boeing's 737 MAX issues. Add it all up, and on a day when a slowing economy was front of mind, investors hit the "eject" button.
It's worth noting that while American does have it's share of issues and is behind rivals such as Delta in terms of revamping operations, the sky isn't falling. American is arguably better positioned than rivals for weakness in Asia, thanks to cutbacks announced last year, and is in the early days of revamping its route network and pricing strategies to increase profitability. The airline expects capital expenditures (capex) spending to come down dramatically over the next few years, which will free up cash to attack its debt load.
It's going to take some time for American to reach its destination. But on a day dominated by panic selling, the American sell-off seems overdone. Even if a recession has arrived, there's not a lot to suggest that American is at risk of flying back into bankruptcy.
This article was originally published on Fool.com