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Why Shares of American Airlines Are Descending Today

By Lou Whiteman - Sep 16, 2019 at 11:02AM

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A spike in oil prices adds fresh turbulence to an already cloudy outlook for the airline.

What happened

Shares of American Airlines Group (AAL 6.88%) fell more than 7% at the open Monday, before recovering slightly, following a weekend spike in oil prices. The entire airline sector is under pressure on Monday, but American is viewed as more vulnerable to a slowdown because of its relatively weak balance sheet compared to its peers.

So what

Oil prices spiked higher on Monday morning following a weekend attack on a Saudi Arabian oil facility took down more than 5.5 million barrels of production. Saudi officials expect to get at least one-third of that capacity back online quickly, but a full recovery could take weeks, if not months.

An American Airlines Boeing 737 on the ground at an airport.

American Airlines is stuck on the tarmac. Image source: American Airlines.

American shares led the declines, but shares of Delta Air Lines (DAL 5.78%) and United Airlines Holdings (UAL 6.94%) were each down more than 2%, and shares of Southwest Airlines (LUV 6.01%) lost less than 1%. Should oil prices remain elevated, airlines can recoup some of the added expense over time via higher ticket prices, but in the near term they will have to absorb it.

Airlines are massive consumers of fuel and so typically come under pressure when oil prices rocket higher. In 2018 the global industry spent nearly $180 billion -- nearly one-fourth of total operating expenses -- on fuel, according to an industry trade group.

American, as the largest consumer of fuel, is likely to feel more of an impact than its peers. The airline is also seen as more at risk in the event of a prolonged downturn because of its elevated debt levels compared to its peers. The company has other issues as well, including labor unrest and the scheduling disruptions due to the grounding of Boeing's 737 MAX.

AAL Total Long Term Debt (Quarterly) Chart

Airline Total Long Term Debt (Quarterly) data by YCharts

Now what

In years past an oil spike was typically a harbinger of a new round of equity-crushing airline bankruptcies. The industry is much healthier now than it was in the past, and American appears at no risk of a Chapter 11 filing, but investor memories die hard.

While American is not in danger of collapse, given the challenges on its plate it is unlikely to be included on a list of top stocks any time soon. Over the next few years the airline intends to revamp its route network and pricing strategies to improve profitability while turning its attention away from capital expenditures and toward deploying its cash to pay down debt.

The potential is there for American, but the oil spike just further complicates an already turbulent near-term outlook for the airline.

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Stocks Mentioned

American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$17.24 (6.88%) $1.11
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$45.00 (6.01%) $2.55
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$46.07 (6.94%) $2.99
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$40.83 (5.78%) $2.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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