What happened
Shares of American Airlines Group (AAL 1.51%) fell another 5% on Tuesday, continuing a difficult week for the airline stock. On Tuesday afternoon, American shares traded at their lowest level since the company emerged from bankruptcy in 2013 as investors continue to fret about growing threat posed by the coronavirus.
So what
American Airlines actually has less exposure to China and Asia than rivals Delta Air Lines and United Holdings, but as the virus has spread globally it is American that is increasingly in investors' crosshairs. Shares of American are down 11% so far in February, compared to Delta's 7% decline and United's 4% drop.
An American Airlines 737 in flight. Image source: American Airlines.
Shares of American are coming under increased pressure because the company is seen as the most vulnerable among major U.S. carriers to a prolonged slowdown in travel demand. American has the highest debt burden among U.S. airlines, and had intended to use 2020 profits to accelerate debt payments.
The virus' rapid spread in Europe and elsewhere in recent days has generated frightening headlines, and put U.S. and other western officials on alert. U.S. Health and Human Services Secretary Alex Azar said on Tuesday there will likely be more coronavirus cases in the U.S., and the Centers for Disease Control put out a report outlining what schools and businesses would likely need to do if a coronavirus outbreak occurred in the U.S.
These headlines come at a time of year when U.S. households are typically making summer vacation plans. Investors are worried that the uncertainty will stifle summer travel demand, eating into airline profits.
Now what
American might be trading at near post-bankruptcy levels, but this is a far healthier company than it was a decade ago. The economic impact of the coronavirus is likely to be substantial, but American Airlines has the balance-sheet strength to weather what is likely ahead.
That said, the potential for a depressed peak summer travel season and American's continued Boeing 737 MAX headwinds will make it more difficult for the company to push forward with its recovery in 2020. Current investors who can handle the turbulence should hold tight but given the uncertainty and the long journey ahead there isn't a compelling reason to climb on board right now.
