Airlines didn’t do much flying last year, but carriers like American Airlines (NASDAQ:AAL) still show signs of a strong rebound. According to many analysts, this is the perfect time to add some airline names like AAL stock to your portfolio.
Why? With the worst of the pandemic behind us, the sector is headed for better days. Although the timeline for a complete recovery is unclear, the vaccine rollout will slowly but surely kickstart a travel rebound. Keeping with this optimism, AAL stock is up 48% year-to-date (YTD), as investors place their bets on this recovery play.
The future of the travel industry is largely speculative. However, if you’re looking to buy and hold a travel stock, American Airlines is a great investment for the long haul.
AAL Stock Will Take Off Soon
Following a year of no travel, there will be a lot of pent-up demand to hop on a flight again. However, there is also still a lot of uncertainty on when this will happen. Vasu Raja, Chief Revenue Officer at American Airlines, notes “It’s a matter of letting the vaccine distribution play out.” However, with delays in distribution of the vaccine, it could take a couple of months before we reach herd immunity. And even after we achieve this, it will take longer for travel to reach pre-pandemic levels.
That said, though, airlines and analysts remain optimistic that a travel rebound is imminent. According to Raja and AAL, searches for airline tickets on its website grow every day. And while those searches don’t necessarily convert (meaning someone buys a ticket), it does at least hint at the pent-up travel demand. Once people feel that it’s safe to travel again, airlines should see a huge spike in ticket purchases.
As this recovery momentum for airlines and AAL stock continues to build, many analysts have expressed enthusiasm toward the industry. According to Raymond James analyst Savanthi Syth, there will be greater demand for leisure travel in the coming months. This demand is likely to pick up in the summer. On its part, AAL is adding new destinations to its itinerary to prepare for a summer influx.
Until this demand comes into fruition, however, airlines are actively working on keeping their cash balances intact. Last quarter, AAL reduced its cash burn rate to $30 million to meet its expenses until it’s able to turn a profit once again.
American Airlines Pays Its Debts
Frequent-flier programs (FFPs) have proven to be sustainable sources of cash flows for major airline carriers. When it comes to American Airlines, it’s leveraging its program to pay down debts this year.
More specifically, the company plans to raise $7.5 billion using its FFP as collateral. Some $5 billion of this will be issued in notes and $2.5 billion will be a term loan backed by its rewards program, AAdvantage. Half of the notes are due in 2026 and the other half in 2029.
The money raised from this funding will be used to pay back a $7.5 billion dollar loan that the airline borrowed from the government under the CARES Act. This was a term loan which the company received in addition to federal aid to cover short-term expenses. AAL says it has used $550 million from the loan so far.
Of course, travel was among the hardest-hit sectors during the pandemic and American Airlines, like many of its peers, is facing a major liquidity crisis. As a result, the airline is actively working to improve its cash position while it awaits the travel rebound.
All in all, the sector is not in a great position right now. But the airline’s decision to actively pay down its dues is a good sign. AAL stock went up slightly following the announcement on Mar. 8.
The Bottom Line
Right now, there is good reason to side with market sentiment and believe that the worst is behind us. However, it is also worth noting that there will be some volatility in airline stocks in the coming months. The vaccine distribution is underway but there are still production delays and supply-chain issues that the health authorities need to overcome. A potential delay in achieving herd immunity will also impact the return of travel.
Looking at the bigger picture, though, a travel rebound is imminent and there is definitely pent-up demand. For investors who are willing to hold and wait, AAL is a great opportunity to buy on the dip. So, consider placing your bets on AAL stock today.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for Investor Place since 2020.