It was a weird day for the airline industry as a whole. While the overall situation for most airlines and airplane manufacturers remains as bad as ever, shares of many aero-related stocks shot up significantly today. One of those happened to be American Airlines (NYSE: AAL), an airline that, at one point, was rumored to possibly going bankrupt sometime soon. While shares of the company ended up climbing a bit today, credit agency S&P Global Ratings ended up officially downgrading the company’s credit rating further into junk status.
The agency downgraded American Airlines from its previous B rating, which already wasn’t that good, to a B- on Wednesday. In comparison, so-called “junk bonds” are from companies whose credit ratings have fallen to BB+ or lower. The lowest possible rating, a D, would mean that a company is in default. While American Airlines isn’t in so dire of a position that it can’t pay its bills (at least at this moment) it’s still bad enough to have many investors wondering about how long the company will stay afloat.
“We expect American to generate a substantial cash flow deficit in 2020 due to the impact of the coronavirus, but to return to positive cash flow generation in 2021. While the company is reducing capacity and some associated costs, and benefits from the steep decline in oil prices, we expect these to continue to be more than offset by much weaker traffic,” said the credit agency in a statement.
Considering the fact that American Airlines is burning through as much as $70 million per day with airfare down around 90% and first-quarter losses for this year coming in at a staggering $2.2 billion, investors are right to be worried. Despite doing the best it can to help stymie losses, S&P went on to say that the company’s results were “less than adequate” and that investors should be careful when it comes to this stock. In many cases, companies can end up going bankrupt with relatively little warning. Although the Trump administration had reached a bailout deal with major airlines back in April, its uncertain whether this will be enough to save the industry from potential collapse.
Despite this news, shares of American Airlines shot up around 5%. Most other airline stocks saw a significant surge as well for some reason, with Delta, United Airlines, and Southwest Airlines all jumping 7.8%, 12.5%, and 5.6%, respectively. Famous investors like Warren Buffet, who tend to buy distressed businesses when times are tough, ended up selling his entire stake in the airline sector, an unusual and alarming move for the man. As such, it’s no surprise that many speculators have wondered whether some of these companies might be going out of business soon. Regardless, top industry experts have said that this pandemic-induced recession has put the airline industry in the worst position its ever been in.
American Airlines Company Profile
American Airlines operates almost 7,000 flights per day to more than 350 destinations in 50 countries from hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C. The company generated roughly $45 billion in revenue during 2018. – Warrior Trading News