It’s a tough time to be in the travel business. Scientists and lawmakers have made it clear that staying home is among the most effective methods of reducing COVID-19 spread. They have recommended a pause in non-essential business travel, and most consumers have lost interest in leisure travel. Some states require a two-week quarantine when visitors arrive, and a number have quarantine rules for those returning from a trip.
Travel between the United States and Europe is banned for most travelers, and the US implemented a No Sail order for cruise ships from March 14, 2020, to October 29, 2020. The lifting of that order did not result in a return to normal operations.
There is now a Conditional Sailing Order that puts a long list of new rules in place for those cruise lines who wish to invite passengers on-board.
In short, the travel industry is in free-fall, and the numbers are looking grim:
- The travel industry contributed nearly $9 trillion to the global GDP in 2019.
- This is expected to drop between 60 percent and 80 percent for 2020.
- In the US alone, the travel economy lost $443 billion between March and October 2020.
- Spending may not reach pre-pandemic rates until 2024.
- The decline risks loss of up to 120 million jobs worldwide.
Hospitality is suffering, but that’s not the biggest hit. Airlines are struggling for their very survival. They have made it quite clear that without government intervention, the damage could be irreparable.
Individual and commercial investors have sold their airline stocks in anticipation of further industry decline. One of the most notable moves came from legendary investor Warren Buffett, who announced that his holding company Berkshire Hathaway divested all of its airline industry assets as of May 2, 2020.
With this in mind, investors are curious about whether it is time to buy in. Could acquiring airline stock at today’s low prices eventually deliver strong returns? If so, American Airlines stock vs Delta: which is best?
Delta Stock Lost 66% [Still Down]
Like many companies, Delta was humming along nicely at the start of 2020. Shares traded around $60, and demand for travel-related services was poised to grow.
In March, Delta lost roughly 66 percent of its value, but unlike peers in other industries, that value was not recovered in subsequent months.
As of mid-November, Delta stock still trades at just half of its pre-pandemic prices.
Delta has had slightly more success in navigating the pandemic as compared to its industry peers, but that relative success still looks rather alarming for investors.
The company posted a third quarter loss of $6.9 billion, in part due to spending rates of $24 million per day. The good news is that Delta has been able to maintain comfortable levels of liquidity, reducing the risk of financial disaster in the near-term.
Adjusted operating revenue dropped by 79 percent year-over-year, and revenues generated from passengers decreased by 83 percent. That’s not expected to return to 2019 levels for at least two years. The incline, when it comes, is likely to be gradual – not a sudden rise that mirrors the dramatic drop.
However, Delta hasn’t given up on positioning itself to lead the industry when travelers are ready to fly again. The company is hard at work on developing strong customer relationships and cementing brand loyalty, so that Delta will be top-of-mind when the time comes.
While few would argue that Delta is a strong buy right now, if you do want to add airline stock to your portfolio, Delta is a better choice than most. For now, the company is managing through the industry crisis as well as can be expected.
Can A Vaccine Save Delta Share Price?
Though Delta is on reasonably firm financial footing for the moment, that won’t last forever. If consumers don’t begin traveling again, Delta will be in trouble.
There are a number of COVID-19 vaccines in late-stage trials, but there are still many unknowns. When the vaccine will be released, how many doses will be available, and how effective the vaccine will be remains unclear. The longer that timeline stretches out, the more likely it is that Delta will start to falter.
American Airlines Investors Have Much To Fear
In February 2020, American Airlines was trading above $30 per share. The 2020 crash brought that price tumbling down practically overnight. Suddenly, American Airlines stock was under $10 per share, and aside from a brief boost in early June, prices haven’t come up in any meaningful way since.
American Airlines delivered its third quarter earnings report in late October, and the news didn’t assuage investor fears.
AAL chose to resume service more quickly than its top competitors, including Delta, in hopes that it would be rewarded by consumers who were anxious to return to the skies.
Unfortunately, things didn’t work out quite that way. It turned out that consumers weren’t particularly interested in flying, given the on-going risk of COVID-19 exposure.
Operating relatively empty planes cost American Airlines a small fortune. The company went through $44 million in cash every day of the third quarter – a figure that is flat out unsustainable.
Management reported an adjusted pre-tax loss of a breathtaking $3.6 billion.
Alas, the fourth quarter doesn’t look much better. The company has projected daily cash burn of up to $30 million. Nearly 25 percent of that goes to making payments on debt and severance obligations, so there is simply no wiggle room to get that number down.
All of that, in addition to the fact that American Airlines had to furlough a large percentage of its workforce, doesn’t bode well for the company and its shareholders.
So, answering the question, “should you invest in American Airlines?”, is fairly straightforward. This is not a good time to buy.
Dangers Of Investing In American Airlines
Some investors are comfortable with risk, and they have a theory when it comes to American Airlines stock. They believe it is possible that American Airlines will return to profitability within a few years, and share prices will recover soon after. If that happens, investors who buy now will be positioned for substantial returns. The problem is that such a scenario appears fairly unlikely.
American Airlines isn’t suffering only from pandemic-related challenges at a level that is on-par with the rest of the industry. It is suffering more, because it wasn’t in an especially strong financial position to begin with.
Now, American Airlines has liabilities in excess of $47.5 billion – a number that will probably reach $50 billion by the first quarter of 2021.
Management has claimed that this can be paid down quickly as soon as demand for services picks up, but that’s quite a gamble in these uncertain times.
While no one expects to see an American Airlines bankruptcy in the short-term, it can’t be ruled over the next few years. That makes American Airlines stock a particularly dangerous choice for even the least risk-averse investors.
American Airlines Vs Delta Stock: The Bottom Line
The bottom line is that neither American Airlines nor Delta stock is a smart investment right now. There are simply too many unknowns when it comes to the travel industry in general and the airline industry in particular. Demand for business and leisure travel will remain extremely low until the COVID-19 pandemic is brought under control, and even then, there is no guarantee of a rapid return to pre-pandemic levels.
Businesses have learned to rely on technology rather than in-person meetings. They may decide that the savings associated with eliminating travel expenses exceeds the value of face-to-face time. If so, demand for airline service will stay lower than it was pre-pandemic.
Leisure travel and tourism are likely to reach previous levels at some point, but there is no telling when that might be. Even after a vaccine becomes available, many will still feel unsafe for months.
If you are committed to having airline stock in your portfolio, Delta is a better choice as compared to American Airlines. However, any trading decisions should be made with extreme care, and investors must remember that Delta is a high-risk stock for the foreseeable future.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.