Should I invest in American Airlines?

Intermediate

American Airline (AAL) has taken a major hit due to the COVID-19 pandemic in 2020, as have all the other airlines, which has subsequently destroyed the demand for air travel as people were forced into lockdown. AAL stock went from $29.32 high in February down to $8.23 low in May. Since then, the price has been fluctuating, bouncing up only slightly to the current level of $15.68. This stock is untouchable for investors at the moment, despite the progress being made with the vaccine and promises that demand will return to sustainable levels during summer 2021. The oracle of Omaha, Warren Buffet, sold his stock in AAL in Spring in 2020. Despite coining the phrase ‘Be greedy, when the others are fearful’, the famous long-term investor has changed his views regarding the future of the airlines.

But is 2021 a better year to buy this stock?

AAL Close up

(AAL weekly chart, 14 January 2021)

Financial Factors

First, let us look at the company’s financials. American Airlines, which has a $9.55 billion market cap, had troubles even before the pandemic. While operating around 700 flights per day into 50 different countries, the company already had revenues falling annually by 9%. According to the Wall Street Journal, as additional travel restrictions were put during summer, AAL’s third-quarter revenue plummeted by 73% year-on-year, reporting $2.4 billion in net losses. Despite some people still travelling during the Christmas period, the demand level is nowhere near enough and the airline continues to burn through cash daily to stay afloat. Based on the projection of the International Air Transport Association, total losses for the airline industry will be almost $40 billion in 2021 and a rebound in air travel demand will only be in 2024. The projections from the Deutsche Bank and Goldman Sachs put the stock price in the range of $15-$20, advising to stay away from investing more until the turnaround in the pandemic.

Technical Analysis

AAL Weekly chart

(AAL weekly chart, 14 Jan 2021)

Based on the chart analysis of AAL, price action broke a strong support level of $25 during the start of the pandemic, this level will now act as a strong resistance and will take significant buying pressure to overcome. Price has been below the 200SMA since April 2018 and 50SMA crossed below the 200SMA, known as the Death Cross, in December 2018, further signalling the downtrend’s strength. A symmetrical triangle pattern has formed once the stock hit the low of $8.23, a warning of potential continuation lower in the coming months. The lowest level for this stock was after the 2008 crash at $1.42, so there is plenty of room to go lower. Brokerage firms report increased buying of airline stocks since they became cheap enough to buy and hold for the long-term, stopping AAL from plunging lower so far. But the situation may change drastically if air travel remains restricted.  

So, should I invest now?

The eyes of investors are on the spring and summer season. Reports from the World Health Organization suggest that lockdowns will ease once warm weather arrives in March and April. Further developments of the vaccine and its distribution bring hope to see air travel demand improve. As American Airlines announced a strategic alliance with JetBlue on January 12, investors are more optimistic that such measures will keep the stock from collapsing.

For an average investor with limited capital investing in this stock right now is dangerous as the pandemic continues to batter air travel, Until the stock finds a way to close at least above $25, there is a real danger of falling into a bull trap. Best to wait until Spring to evaluate potential entry into this stock. Big banks and Hedge Funds will, of course, continue to hold AAL stock long-haul, because they can afford it. But should there be another hit in the USA and worsening conditions of the pandemic, they will immediately sell it.

Important to remember, that this company is protected by the US government is unlikely to sink completely. Additional bailouts will be ready if needed. We shall know more after Biden’s inauguration on January 20 and see how his administration plans to support the airline’s industry. 

Editor

Anton is an accomplished Director at Markom Development Ltd where he combines cross functional competencies in staff management, operations planning, customer retention and strategy development. BU... Continued

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