Categories Analysis, Earnings, Industrials

American Airlines stock faces turbulence from Saudi oil crisis

The airline industry has suffered a double whammy this year, in the form of the Boeing fleet grounding and the oil crisis that followed the attack on a plant in Saudi the other day. As the production disruption at Aramco is estimated to be the biggest the oil sector has ever witnessed, its impact is likely to linger in the coming months.

The plant shutdown, after last week’s drone attack, has reduced Aramco’s daily production by about 6 million barrels. The scale of the disruption indicates that oil price will remain elevated, weighing on the profitability of aviation companies in the US.

Oil Crisis

American Airlines (NASDAQ: AAL), which operates the largest passenger aircraft fleet in the world, encountered multiple challenges this year, including problems caused by worker strikes and grounding of the Boeing 737 Max fleet. While these factors have put the management’s growth plans under pressure, the Aramco crisis weakened the company’s overall outlook further.

American Airlines (AAL) reports solid Q2 earnings despite 737 Max grounding

The pricing pressure currently facing the airline industry due to stiff competition, which demands promotional offers including heavy discounts, could hamper American Airlines’ efforts to boost margins. However, the second quarter was exceptionally good for the company, which recorded double-digit earnings and revenue growth aided by stable traffic growth, despite a weak start to the year.

Tough Task Ahead

What needs to be seen is how far the Fort Worth, Texas-based company will be successful in increasing shareholder value as its announced earlier. Since it is an expensive and tough task to overcome the disruptions caused by the fleet grounding and labor unrest, American Airlines will have to wait until next year before its growth program yields results.

Also see: Southwest Airlines beats Q2 earnings estimates

Meanwhile, a report published by the company earlier this month said it would have invested more than $30 billion in the business by the end of the year. Consequently, there will be a reduction in capital spending in the coming years, which points to an improvement in the long-term cash flow.

Buy AAL Stock?

Analysts, in general, have assigned buy rating to American Airlines, with a consensus price target of $38.44. The stock opened Monday’s trading sharply lower and ended the session down 7%, representing the biggest intraday loss in recent times. However, it pared a part of the loss during Tuesday’s early trading session.

Related: American Airlines Q1 2019 Earnings Call Transcript

The shares have been on a downward spiral for more than a year, losing about 48% since the beginning of 2018. Though the stock had bounced back at regular intervals this year, each time it retreated and slipped to new lows.

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