What happened
Shares of American Airlines Group (AAL -2.06%) opened on Friday up 30% after climbing 40% on Thursday. Investors are getting excited about a recovery in the travel sector, but they appear to be getting ahead of themselves.
So what
It has been a strange, turbulent year for airline stocks.
The sector was hit hard by the COVID-19 pandemic, which caused carriers to slash flights and scramble to avoid liquidity issues. Shares of American and other airlines lost more than half of their value beginning in early February on fears there would be a number of bankruptcies in the sector.
Image source: American Airlines.
American was hit particularly hard because the airline had the most debt among U.S. carriers, and the company was seen as being particularly vulnerable to an extended downturn.
It now appears possible travel bottomed out in April and is beginning to recover. American said Thursday that it was restoring a significant number of flights in July due to increased demand. The airline said it averaged 110,330 passengers per day in the last week of May, more than triple the 32,154 daily passenger average for April.
Investors are cheering a return to normalcy, sending the shares higher. A better-than-expected jobs report on Friday also helped give the sector lift, as it was viewed as a sign the economy is beginning to recover from the pandemic crisis.
Now what
The news is good, and the data is pointing in the right direction. But investors need to be careful not to jump the gun. American is restoring flights, but still plans to fly only about 55% of its capacity from July 2019. Even if the crisis is largely over, it is likely to take years for demand to fully recover, and airlines -- including American -- have loaded their balance sheets with debt to survive the crisis.
It also remains to be seen how much discounting airlines are doing to fill these flights. The carriers have to stay at full employment through Sept. 30 as a condition of the CARES Act bailout bill, so there is some argument to be made for flying even if flights are not soundly profitable. And given the way the stock has pushed higher and the amount of debt American has, the airline could consider a secondary offering to raise fresh cash that would dilute current holders.
We also do not yet know if there will be a second wave of infections, or what the economy will do in the months to come. It all adds up to a lot of risk and a lot of uncertainty.
The numbers are encouraging, but given the risks that still remain, investors need to focus on the industry's top performers. American is not on that list, and the current rally feels overdone.
