AAL Stock: Time to Dump American Airlines Group Inc?

AAL stockCan AAL Stock Rebound from Brexit Vote?

Since the start of the year, American Airlines Group Inc (NASDAQ:AAL) stock has suffered on Wall Street. Shares have lost some 36% year-to-date. Given its massive presence, serving the intercontinental routes between the United States and the United Kingdom, few were surprised that AAL stock suffered. What left many speechless was the extent of the drop.

American Airlines stock lost as much as 16.08% at one point. It recovered somewhat later in the day to cap the loss at 10.81%.

It is a standard of airline stocks that they go up when oil prices fall. Well, oil prices did fall following the Brexit results; they gave up much of the gains oil made in the past weeks. Still, American Airlines stock dropped like a Boeing “747” with one wing. Such is the effect of the Brexit.

Ostensibly, other major airline stocks will suffer as well. Indeed, the Brexit challenges the International Air Transport Association’s (IATA) expectations that airlines could see profits of $36.3 billion in 2016. (Source: “IATA chief: Airline profitability is good for all,” Air Transport World, February 25, 2016.)

Indeed, even among airlines that encourage bullish positions, American Airlines stood out as a top pick for this year. Now, American Airlines will likely have to lower its financial outlook following the victory of the Brexit camp in the referendum over the United Kingdom’s membership in the European Union.

The big question is this: how long will the turbulence last?

In theory, the markets will worry over American Airlines’ stock for the period of the referendum—that is the few weeks ahead and after the outcome. Should Amercian Airlines report good traffic numbers and yields in its second-quarter 2016 results in July, AAL stock could recover much lost altitude, Brexit or not.

Until then, anyone who holds AAL stock should expect strong turbulence. The news will focus on the various dramatic scenarios that the United Kingdom will face as a result of the Brexit. For starters, Prime Minister Cameron said he would resign. Meanwhile, the City of London is bracing itself for a hemorrhage of financial industry departures, as many multinational institutions decide to move to other EU financial centers, whether that be Frankfurt, Paris, or Milan.

In a best-case scenario, the cautiously optimistic case for American Airlines stock is that following the referendum result—and the associated market volatility—it can still expect higher operating profits in 2016. It just can’t deliver any bullish surprises because 2015 was a good year thanks to higher traffic.

Indeed, the favorable traffic trend continued in May, according to American Airlines Group’s May and year-to-date 2016 traffic results. The company’s total revenue passenger miles (RPMs) increased 0.5% to 19.4 billion compared to May 2015. This is a good result considering total capacity increased 1.7% in the same period. However, passenger load factor dropped almost one percent to 81.9% versus May 2015. (Source: “American Airlines (AAL) Load Factor Fell 0.9 Points in May; Q2 PRASM Outlook Affirmed,” Street Insider, June 9, 2016.)

Certainly, had the British people voted to stay in the EU, American Airlines would have benefited from a more secure European air transport market, which would have sent a bullish current over the stock. The lower jet-fuel price will not compensate AA for the lost earnings due to the Brexit. Overall, while the Brexit will amplify the perception of lower demand for transatlantic rights, American Airlines and AAL stock should recover any Brexit-related losses.

AA stock’s type of business is simply not the kind to be affected and not all airlines can say this. Ryanair or easyJet, which have built huge customer bases in the EU, will suffer. For these low-cost airlines in particular, the Brexit is serious. These airlines fly within the EU only and their business relies on lower airspace agreements. With Britain leaving the EU, Ryanair and easyJet will have to re-negotiate these agreements. Otherwise, they won’t be able to offer the low rates they do now.

American Airlines, meanwhile, would have benefited from Britain remaining in the European Union, but it has nothing to lose directly from a Brexit as it’s an American company. It never had the same rights as easyJet or similar EU-based carriers. AA stock has nothing to lose from Britain’s departure from the European Union.