The coronavirus pandemic has had a huge impact on the entire global economy, and the airline sector in particular has suffered from travel restrictions and efforts to slow the spread of contagion. American Airlines Group (AAL 0.94%) lost more than 70% of its value between mid-February and mid-May as air travel slowed to a near-standstill. From there, though, American Airlines stock more than doubled as hopes emerged for a potential recovery.
The airline industry has been risky for investors throughout its history, with numerous bankruptcies over the years. Less than a decade ago, American itself was in bankruptcy proceedings, but shareholders are hopeful that it can avoid the same fate this time around. For American to mount a true rebound, it needs to work toward making three favorable things happen.
Image source: American Airlines.
1. Travel trends need to keep improving domestically
The key for airlines like American to recover fully is for passengers to feel comfortable taking to the skies again. We've already seen a huge bounce in the number travelers at U.S. airports, with the Transportation Security Administration reporting that more than 500,000 people have moved through checkpoints on four of the past five days as of June 15. That's up from fewer than 100,000 travelers as recently as April 22.
To be clear, there's still a long way to go. Roughly 2.7 million travelers went through security checkpoints this time last year, meaning that current levels are still just 20% of where they were in 2019. However, American is seeing signs that more passengers are willing to consider flying again, and that's a trend that definitely needs to continue.
2. International travel needs to open up
American does a significant amount of business flying internationally, and there, the story is a lot uglier. Travel restrictions remain in place throughout much of the world, with countries only now starting to look at reopening their borders. The European Union has now allowed travel among many of its member countries, with part of the intent to attract international tourists.
Unfortunately, the U.S. hasn't done a good enough job of containing the COVID-19 outbreak to inspire confidence among other nations, and it could be a long time before U.S. tourists are welcome in other parts of the world. The longer it takes for free travel to return, the harder it will be for American to restore that portion of its service. Although domestic travel is arguably more important, American does need international travel to recover if it wants to return to its pre-coronavirus success.
3. American has to keep slashing costs as it finds a viable operational model
American has thus far done a good job of trying to reduce its expenses as much as it can. The amount of negative cash flow has fallen from roughly $100 million per day in early April to just $40 million per day in June, and the company has a goal of being cash-flow neutral by the end of 2020.
That's essential to American's survival, because between tapping government assistance and turning to public markets, the airline has already gotten all of the easy capital it's going to get. Only by finding new ways to cut costs can American preserve the reserves it's managed to build, and its remaining cash could prove to be what makes or breaks the airline's chances to survive.
Setting up for the long run
Eventually, American has to answer questions like what air travel will look like in a post-coronavirus world, as safety concerns for it and other airlines to reconsider their past practices of packing in as many passengers as possible. Those are questions for later, though, and right now, American shareholders need more concrete signs that air travel isn't destined to disappear in order to justify the big bounce the airline stock has already seen.
