Jayson DerrickThe first three weeks of 2021 have proven to be identical to the majority of 2020 for the travel and leisure industry. At the start of 2021, the Covid-19 pandemic continues to ravage the world with many countries reporting all-time high infection rates and daily death counts.
This was, for the most part, expected. Timelines for when the global economy would show signs of recovery and return to some form of normality remain mixed. But few if any estimates called for a rebound in the first few months of 2021 or even before the year's halfway point.
Travel and leisure stocks remain, for the most part, at depressed levels on a year-over-year basis. Some stocks, such as American Airlines, are down a lot more than others. Specifically, AAL stock is down around 43 per cent over the past year versus Delta Air Lines (-32 per cent), JetBlue Airways (-28 per cent), Southwest Airlines (-21 per cent) and Alaska Air Group (-20 per cent).
Meanwhile, shares of Allegiant Travel Company are up 11 per cent over the past year and United Airlines Holdings’ stock is among the very few global travel and leisure stocks that have performed worse than American Airlines.
American Airlines stock is the focus of much investor attention given its status as the world’s largest airline based on scheduled revenue passenger miles.
So, investors are naturally looking at American Airlines’ stock as part of a recovery theme rebound. Does this make American Airlines a good stock to buy now?
The near-term case for airline stocks takes a hit
The American Airlines stock forecast is difficult to model as there is much that can go right or wrong in the global travel industry’s rebound. The current consensus view is that demand for airline travel will return once a large number of people opt for the vaccine and daily case rates ease substantially.
Morgan Stanley analysts said in late October that air travel demand could return to pre-Covid levels by the end of the year or in early 2021. Granted, the path is unclear and could subject to unexpected changes.
Most notably, airline stocks fell on Monday, January 25, in reaction to a concerning vaccine headline. Specifically, Merck said it will end its Covid-19 program due to weak data. While investors immediately lowered their American Airlines stock forecast for 2021 after Merck’s upsetting report, favourable updates from other vaccine makers such as Johnson & Johnson’s one-dose vaccine would help lift AAL stock predictions.
The longer-term case is a bit clearer
The case for a bullish American Airlines stock prediction in 2021 has become a bit more difficult to justify. But, the longer-term case for airline stocks affords the luxury of investors overlooking or even ignoring near-term disruptions, such as Merck's vaccine announcement.
The same Morgan Stanley analyst report notes that passenger demand for air travel has historically rebounded four years after a major event. This was the case after the 9/11 terror attacks, the 2002 SARS outbreak, the 2008 global financial crisis event in 2008, and the MERS outbreaks in 2014.
However, the Covid-19 pandemic could prove to be different from the previous crisis, so a recovery timeline might be more rapid, according to the analysts. It is unclear if this means a recovery will be seen in late 2021/early 2022 or late 2022/early 2023.
While difficult to put a number on AAL stock forecast 2025, one would (hopefully) assume the Covid-19 pandemic is a distant memory within three years and is followed by a tremendous surge in global air travel.
The latest American Airlines share price forecast from 18 analysts surveyed by CNN Money sees the company’s shares trading 22 per cent lower than the last price of $15.33 over the next 12 months at the median price target of $12.00. The highest analysts’ target is $27.00 and the lowest one is just $1.00 .
American Airlines share price forecast hurt by recent news, but not all is bad
Investors taking a look at the latest news reports to determine if American Airlines stock is buy or sell have a mixed bag of metrics to analyse.
Back in early December, American Airlines cautioned investors that it expects to report an average daily cash burn near the high-end of its prior guidance range of $25m to $30m per day in the fourth quarter.
The company attributed its poorer-than-expected outlook to rising Covid-19 infection rates and travel restrictions. It goes without saying that both headwinds intensified in the weeks following its December report.
But, the American Airlines (AAL) stock analysis needs to include more than just one metric. The company eased some concerns and said it will likely end the fourth quarter with more than $14bn in liquidity after raising $1.2bn in the quarter.
According to one of the most notable aviation news websites, Simple Flying, an airliner’s liquidity position is a very important metric to look at. At a time when the industry continues to struggle from a problem it has not created, companies still have expenses that need to be taken care of.
American Airlines deserves credit for making the right moves to bolster its balance sheet through loan agreements, cost-cutting initiatives, and using its aircraft to secure funding, among other measures.
Trade American Airlines Group Inc. - AAL CFD
United Airlines and Delta earnings a sigh of relief
Two major American Airlines rivals reported earnings in January and this could help with AAL stock predictions. First, Delta reported quarterly results on January 14 in which revenue fell 65 per cent year-over-year to $3.97bn and this figure included a one-time $441m gain from third-party refinery sales.
Now, on to the positives. Delta said its cash burn was slashed in half from the third quarter and management expects 2021 will serve as a “turning point." Delta has said investors will see the company post revenue growth, profit and positive free cash flow generation.
Delta CEO Ed Bastian told CNBC that 51 per cent of corporate travellers it surveyed believe a return to 2019 levels will be seen by 2023 and 40 per cent said by 2022. Encouragingly, the CEO also said that corporate travel among small- and medium-sized companies is already on the rebound.
United Airlines’ report six days later was much of the same: a very poor earnings release followed by an encouraging multi-year update from management.
United reported a 69 per cent decline in revenue in the fourth quarter and this culminated in the largest yearly net loss of $7.07bn since 2005. CEO Scott Kirby also told CNBC that the company bottomed in the second quarter of 2020 and has improved every quarter since then.
Conclusion: positive in the longer-term
It goes without saying that the near-term outlook, for the airline industry generally and American Airlines in particular, is uncertain. But, as a heavily beaten up stock in a prime “reopening” sector of travel, investors can responsibly and carefully allocate a small position to travel stocks in their portfolio.
When there is greater clarity related to an exact timeline of a full recovery, investors can then increase their exposure to the group. But establishing a baseline position at current levels isn’t the worst idea investors can come up with in these turbulent and volatile times.
