What happened
Shares of American Airlines Group (AAL -2.18%) continued their steady descent on Friday, falling another 6%. The stock is now down 30% for the week as investors try to gauge the full ramifications of the COVID-19 coronavirus outbreak on the airline industry.
So what
A miserable week for markets has been even more painful for airline investors, as evidence grows that the coronavirus outbreak will eat into first-quarter revenues and profitability, and the likelihood that the virus will impact future quarters grows.
United Airlines Holdings suspended service throughout Asia on Friday until April, and there is a growing concern that the spread of the virus in the U.S. and other regions of the world will lead to depressed U.S. summer vacation bookings.
Image source: American Airlines.
American shares have fallen faster and harder than most of its rivals because the airline is considered to be the most vulnerable to a prolonged slowdown in travel demand. The airline has the highest debt burden among U.S. carriers, and going into 2020 it had made paying down that debt a priority. With the Boeing 737 MAX grounding impacting operations and now the threat of lower revenue and profits for the year due to health concerns, American's recovery is going to take longer than expected to materialize.
Now what
The sell-off in airlines this week has not been panic-selling. The coronavirus is definitely going to affect operations, and American is particularly vulnerable. Still, it feels like we are reaching a point where something has to give.
As of Friday afternoon, American trades at just 0.30 times sales and 8.6 times trailing earnings. Granted, earnings are likely to come in lower than expected this year, but the business remains healthy enough to weather a poor summer season and avoid a bankruptcy or major reorganization.
Looking past the coronavirus, there are potential catalysts for American shares in the second half of 2020, assuming the 737 MAX is finally returned to service and the company's 2019 cost-cutting and revenue enhancement plans start bearing fruit. It's hard to imagine regulators allowing a rival airline to acquire American, but if the shares fall much further it's possible financial buyers could give the company a hard look.
Given the near-term uncertainty, it is understandable most investors have decided to watch this play out from the sidelines. But for those who can handle the turbulence, it is a good time to be watching American Airlines shares closely.
