Why Shares of American Airlines Lost Altitude in July

What happened

Shares of American Airlines Group (NASDAQ: AAL) lost 14.9% in July, according to data provided by S&P Global Market Intelligence, as early summer hopes for a rebound in demand proved to be premature. The company has a long journey to normal ahead of it, and increasingly investors are deciding not to climb on board.

AAL Chart

AAL data by YCharts

So what

It's been a turbulent ride for American shareholders. The stock is down 61% for the year but prior to the July fall had gained 24% in June. Airlines have been hit hard by the pandemic, which has cut travel demand to near-zero, and from the start, American has been considered the most vulnerable to an extended downturn.

American entered the crisis with the most debt among airlines, and in years past airlines with high debt balances almost inevitably were a bankruptcy risk if the economy turned south. But, despite the debt, American was relatively well positioned heading into this downturn, and has benefited from government funding provided by the CARES Act.

An American Airlines tail lit up at night.

Image source: American Airlines.

The stock rose in June on some encouraging early summer signs that traffic was returning, but fell in July after it became clear that momentum had stalled. A spike in new COVID-19 cases in a number of U.S. states led to a fresh round of worries about the health of the economy. And with most current travel demand tied to leisure and vacations, it seems likely airlines will shrink heading into the fall instead of continuing to add flights.

American highlighted the difficult situation airlines are in when it announced second-quarter results mid-month. The airline lost $7.82 per share in the quarter on revenue of $1.62 billion. The revenue number was down 86.5% year over year.

Now what

The good news is American remains no immediate threat to end up in bankruptcy. The airline expects to end the third quarter with about $13 billion in available liquidity, and is working toward getting to cash breakeven in 2021 even if demand doesn't return.

The bad news is those actions will likely be necessary, because 2021 is increasingly looking like a lost year. And even if American can avoid Chapter 11 it remains a wounded company that will have considerable debt and other baggage coming out of this crisis that will make it difficult for the airline to gain altitude in the years to come.

American management has done a good job making sure the airline lives to fly another day. But investors are best watching this play out from the tarmac for now.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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