Investors Should Dump American Airlines and Here's WhyAAL).
The primary reason why I think American Airlines will have a troubled year ahead is because of its ongoing price war with ultra-low cost carriers like Spirit airlines (SAVE). Price wars have led to bankruptcies in the past and it will likely put investors off from both the stocks.
Investors have been overly skeptic about declining unit revenue over the last few months and have punished many airline stocks despite earnings growth. Price war with Spirit will have a huge negative impact on American Airlines’ unit revenue, which is why I think investors should avoid the stock in 2016.
Moreover, Spirit’s unit cost is also a lot lower than American Airlines’, which is why I think the stock will likely tread lower in 2016.
Another thing that investors hate about American Airlines is the company’s huge debt burden. The company has no plans to reduce its debt and instead has focused on share repurchases and improving its fleet. However, American Airlines will not get a better opportunity to reduce its debt in the future if crude prices increase this year.
The company should start reducing debt while crude oil is low. Although the company’s interests expenses are low, investors are spooked by its huge debt burden and a strategic repayment plans will boost the stock by luring more investors. However, American Airlines has no plans of reducing debt, which is why I think the stock is a sell for now.
There’s a possibility that American Airlines’ initiatives will benefit the company, however it is the market’s reaction to its initiatives that will affect the share price. Given the Street’s obsession with American Airlines’ debt load and unit revenue, the stock will underperform even if its initiatives are fruitful. Hence, I think investors should dump American Airlines and look for a better stock in the aviation industry.
Published on Jan 5, 2016By Akshansh Gandhi