Investors Should Dump American Airlines and Here's Why

Due to the crash in crude oil prices, most of the airlines have appreciated substantially over the last 18 months. Given the volatility in crude oil prices, investing in an airline just because of cheap fuel is a bad idea. While I’m bullish on the aviation industry going forward, I think investors should choose their investments carefully as not all airline stocks will outperform in the future. One stock that I think will not do well in 2016 in America Airlines (AAL).

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.
Even if American Airlines benefits from the price war, investors will react negatively to it due to the past events.

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.

Debt Load

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.

Conclusion

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, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

Posted in ...