Shares of American Airlines (NYSE: AAL)
tend to move in line with peers Delta Air Lines (NYSE: DAL)
and United Continental (NYSE: UAL)
, but may be setting up for a harder fall. The S&P 500 index (NYSEARCA: SPY)
has made a dramatic recovery off its Mar. 23, 2020 lows. The travel and leisure industry arguably suffered the worst damage and was one of the last group of stocks to rally on the restart narrative. Unfortunately, fears of a second wave of COVID-19 spread have stifled upside follow through as the SPY retreats from recent recovery highs. Of the airline group, American Airlines is the worst of the bunch and investors may want to consider unwinding positions on any further rally attempts before it faces possibly disconnecting with its peers.
On June 12, 2020, American Airlines provided an update on its operations. The Company expects Q2 2020 revenues to be down (-90%) year-over-year (YoY) with total system capacity down (-75%) YoY.
The Company has received $5.8 billion in federal payroll subsidy from the CARES Act and a $1 billion one-year term loan bringing total liquidity to $11.3 billion. The Company estimates it has $7.45 billion worth of assets that include slots, gates and routes that it can use to collateralize future debt offerings including junk bonds. Cowen raised its price target to $20 due to the network recovery while having enough cash to last nine months at a daily burn rate of $40 million.
Debt-Fueled Buy Backs
American Airlines was exposed during the pandemic to be the least prepared for the economic freeze stemming for isolation mandates keeping travelers locked down at home. With over $25 billion in debt and losses climbing in the millions per-day, iconic investors like Warren Buffet dumped their holdings across the board in the airline sector. The shocking lack of cash exposed how management took on debt to buy back stock, which did little but provide liquidity for sellers as share collapsed during the COVID-19 black swan. This generated lots of controversy with the Treasury Department and Congress extending bailout-like financings. Ultimately, they were banned from using government proceeds to buyback shares in exchange for loans. Countries that are close to eradicating COVID-19 are instituting travel bans to limit a second wave.
Warren Buffett stated that Berkshire Hathaway (NYSE: BRK.B) had sold all it’s stakes in the four largest airlines including American Airlines after taking nearly (-50%) losses on the investments. The historical metric of legacy airline carriers is that a (-15%) drop in revenues is enough to trigger bankruptcy due to the industry’s tremendous operational and financial leverage. Northwest Airlines fell under this axiom after Hurricane Katrina in 2005. As of the June 2020 update, American Airlines stated their YoY revenues have dropped by (-90%) YoY. Another thing to keep in mind is that employee payroll is the largest expense for the airlines, which has been staved off temporarily by the CARES Act (payroll subsidy) until September 2020. Failing future government financing and grants, their largest expense may push them into bankruptcy. Investors should be aware of this potential ticking time bomb and consider unwinding positions on favorable price rallies.
AAL Price Trajectories
Using the rifle charts on a monthly, weekly and daily time frame provides a broader view of the landscape for AAL stock. The monthly rifle chart triggered a market structure low (MSL) above $22.80. The bulls really botched it setting the bar too high. The monthly stochastic is still under the 20-band with a potential cross up or mini inverse pup if shares fall under the monthly 5-period moving average (MA) price of $13.95 to $13.80 Fibonacci (fib) level. The weekly rifle chart has a stochastic mini pup with support at the 5-pd MA at $14.31 but risks a weekly market structure high trigger under $15.07. The daily is in a make or break with a potential pup breakout if the stochastic forms a mini pup. The upside trajectory on the daily and weekly mini pups target $17.87 fib, $19.88 fib, $21.54 fib and $22.80 monthly MSL trigger and possible monthly 15-pd MA. The $25.83 fib is the best-case bullish scenario that triggers on a monthly stochastic cross attempt at the 20-band. Investors may want to use these opportunities to unwind positions on upward surges. It’s prudent to keep in mind the downside trajectories for potential stop-loss triggers ahead of the September expiration of payroll subsidies.
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