American Airlines Group Inc (NASDAQ:AAL) and Southwest Airlines Co (NYSE:LUV) were at ground zero of the coronavirus pandemic. They lost 95 percent of revenue in March as global lockdown orders hit and they issued travel restrictions that turned airports into ghost towns. As the year continued, these airlines could reopen and travel has been slowly picking up.
Meanwhile, each of these companies implemented aggressive cost-cutting strategies to slow daily cash burn rates while ramping up passenger capacities.
So, which is the better investment between American Airlines stock vs Southwest Airlines?
Both are in for a slow recovery that’s likely to drag well into the 2020s. It will not be easy – the government’s bailout grants are gone, and the stimulus loans being offered give them debt to work through.
Thankfully, it is low-interest debt, and air travel is picking back up heading into the holiday season. Investing in airline stocks right now could provide a discount on a long-term value, assuming things return to normal. What can investors expect in the coming years?
Southwest Stock Plummeted Along With Revenues
Southwest Airlines stock crashed to a 52-week low of $22.46 at the onset of the coronavirus, and it’s still struggling to reach its pre-covid price range of $55-$60 per share.
This is after reporting a record third-quarter loss of nearly $1.2 billion and announcing it is likely to furlough employees starting in 2021.
Although revenue declined 68.2 percent in the quarter, it still beat estimated with a 68.2 percent year-over-year decline.
It slowed its daily cash burn to $16 million per day by the end of the summer while fulfilling increased demand for Labor Day and into the holiday season.
A second wave of the coronavirus is hitting in the winter with flu season hot on its tail. While this is slowing the travel growth, Southwest is prepared with the lowest debt-to-equity ratio among the airlines and implemented its own passenger capacity limit to ensure social distancing between travelers.
While it slowly started to budge toward the end of October, this high ground could prove to gain customer loyalty in a stigmatizing age.
Twenty years ago, Southwest was an aggressive startup that had such a positive effect on the markets it served that the term “Southwest Effect” was coined. It’s still the leanest airline in the majors and should have no trouble providing value to passengers during rough economic times. But it’s competing with bigger airlines, most notably American.
American Airlines Debt/Equity Ratio Soars
American Airlines is the biggest airline in North America based on passengers carried, with 205.2 million people traveling on it in 2019. Of course, being at the top gave it a larger fall when the coronavirus shutdowns grounded flights.
In fact, the company’s net debt as of its most recent earnings report was $30.81 billion, which is the biggest debt in the industry.
It’s pushing to lower its daily cash burn rate to $25 million or lower, but it’s still nowhere near recovering from the price plummet it experienced at the onset of the pandemic.
At the time, it dropped to a 52-week low of $8.25, and shares are still hovering around $10 during the holiday season.
While it weighs its balance sheets down with debt, it has $65.54 billion in total assets to help offset this. The company is also taking steps like furloughing workers to cut costs and extend its operational roadmap. It’s taking some steps to help protect passengers through social distancing with trials using mobile ID verification and checkout apps.
The company’s management also slowed its airplane orders and prepared to run leaner operations for the next two years, as they still expect the lack of business travel to hamper the industry for another year.
American Airlines’ market cap hovering around $5 billion to $6 billion about a third of its market cap in 2019, and even that was on the downswing since 2017. But regardless of how many times the company’s market cap tanks, it historically overcomes its problems and gets back in the game.
Bullish investors hope it will do so again in the 2020s.
Risks of Buying Southwest Stock
Southwest recovered from the coronavirus crash better than American Airlines, but it’s still not on a solid foundation.
The crash brought the company its first quarterly loss in almost a decade, and it’s unclear when skies will be clear for it to fly high again.
The company’s history of overcoming adversity and maintaining costs will be challenged by the possible drop in demand with both major conventions being held virtually and a second coronavirus wave coming up.
The CARES Act federal aid is gone, and Southwest will need to be a leaner company doing more with less for the next two years. Investors who can’t wait that long are in for turbulence.
Is American Airlines Share Price In Danger?
American Airlines has more risk than Southwest if business travel doesn’t climb back up to pre-coronavirus levels. The company’s debt sheets and slimmer staffing make it difficult to find its way out of the crisis.
High interest rates and lease prices kept the company stuck at $44 million per day cash burn through the third quarter. A portion of this burn rate is for severance pay for workers it had to let go to stay in business.
Even in its best outlook, American Airlines is prepared to be a slimmer company at least through 2021, and investors should be aware it could take a few years before this stock takes off again.
American Airlines Vs Southwest Stock: The Bottom Line
Both American Airlines and Southwest are experiencing an unprecedented hit to the airline industry in 2020.
The coronavirus pandemic caused a 95 percent drop in revenues during March 2020, and neither company reached its pre-Covid levels, although Southwest is doing better between the two. American Airlines has more debt on its books, and Southwest is giving passengers more social distancing options while air travel picks back up.
Whichever airline you choose, it’s facing a turbulent economy for at least the next year. Don’t expect either company to recover any time sooner, as analyst expectations across the industry show it’ll be a slow climb.
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