COVID-19 has undoubtedly decimated the airline industry due to border closures, safety concerns, high unemployment levels, and business austerity. Indeed, one of the nation's biggest airlines, American Airlines Group (AAL 3.91%), saw its stock fall by as much as 48% over the last twelve months, while the S&P 500 gained 20%.
What's more, pundits are now saying that global air travel may not recover until 2024. However, one key reason may cause the sector to regain its passenger volume much sooner than expected, and American Airlines could be among the best placed to benefit from an industry-wide rebound. Let us take a look.
The worst seems to be over
During the height of the pandemic in April, when fatality rates were at their highest, American Airlines' fleet operated with as little as 15% capacity, and generated just $0.018 in revenue per available seat mile (RASM). Fortunately, that was the nadir of the company's operations. American Airlines' cash burn has since narrowed from $100 million per day in April, to $56 million per day through May, to $30 million per day in June.
Simultaneously, the company's commercial capacity improved to 45% and 64% in May and June, respectively. With decreasing infection rates in the U.S. as of August 30, states may probably decide to lift lockdown measures for good and accelerate reopening the economy, further boosting consumers' confidence in air travel. Moreover, recent data indicates that there have been few to no cases of SARS-CoV-2 transmitting onboard aircraft, primarily due to airliners' efforts to screen passengers before boarding, enforce mask rules, and install robust air filtration systems.
Air travel can rebound as early as this year
With the help of biotech companies, immunity against SARS-CoV-2 may be just around the corner. There are currently nine coronavirus vaccines undergoing Phase-3 efficacy tests in large-scale clinical trials. Preliminary results suggest they produced strong immune responses in smaller population groups. A vaccine for the coronavirus may enter regulatory review by the U.S. Food and Drug Administration (FDA) as early as October.
If successful, companies researching a coronavirus vaccine will have a combined manufacturing capacity of billions of doses by the end of next year. Rest assured, the vaccine will be universally accessible pending approval. For example, large-cap pharmaceutical company Pfizer (PFE 0.77%) is pricing its vaccine candidate at just $19.50 per dose, or $39 for one immunization treatment course.
Turnaround in progress
During the second quarter of 2020, American Airlines secured a $4.75 billion loan from the U.S. Department of Treasury and raised over $3.6 billion from capital markets. In August, American Airlines borrowed $1.2 billion from Goldman Sachs. Furthermore, the company received $2 billion from the Payroll Support Program during the quarter, causing its net loss to narrow from $3.4 billion to $2.1 billion. American Airlines now has a total combined liquidity of $16.2 billion, which is more than enough to sustain its quarterly net loss until 2022 at current rates.
In addition, management is taking aggressive measures to right size operations before liquidity runs out. In fact, management aims to turn American Airlines cash flow positive by 2021.
Here are a few reasons why investors can take comfort in American's progress: First, the company's unions are in talks to extend Payroll Support Programs to 2021. Second, American Airlines is cutting its active fleet by 150 aircraft, thus reducing unnecessary operational expenses. Finally, management is slashing its unprofitable routes, most of which are between small cities.
All these measures are having a dramatic effect on the company's turnaround efforts. For example, from April through June, the company's RASM increased nearly six-fold to $0.103. Almost 60% of the company's operations originate from its Dallas and Charlotte hubs, which produced RASMs of up to $0.120. That's almost comparable to pre-pandemic RASM of $0.152 that it generated in the second quarter of 2019.
Takeaways for investors
American Airlines still holds an impressive 10% market share in the global air travel sector. The company stands to benefit tremendously in the event that a coronavirus vaccine enters the market next year, thanks to its ability to adapt quickly in a changing environment.
Last year, American Airlines generated $45.8 billion in revenue and $3.79 in earnings per share, and paid out $0.40 a share in dividends. The market will reward the company should its operations make a turnaround and performance starts to match previous peaks within a short period. For investors who are bargain hunting for industrial stocks, American Airlines seems like a great bet.