Wall Street is increasingly worried about the direction of the economy, and as a result investors are selling off companies that could be most exposed to a downturn.
Shares of American Airlines Group (AAL -4.07%), arguably one of the most vulnerable of the airlines, traded down 5% as of 1:30 p.m. ET.
Headwinds on the horizon
Airline stocks tend to be cyclical, doing better when times are good and falling off when consumer confidence falls. Households are more likely to forgo a vacation than a grocery store run, so demand typically falls off if consumers are feeling pinched.
In years past, recessions have caused the failure of airline brands including Eastern, Braniff, and TWA.
American is relatively healthy compared to those failed brands, but the airline appears more vulnerable than its peers should conditions get worse from here. The airline entered the pandemic trailing rivals including Delta Air Lines and United Airlines Holdings in terms of streamlining, and currently carries a higher debt load than those rivals.
American currently trades at an enterprise value, which includes market cap and debt, more than 9 times its earnings before interest, taxes, depreciation, and amortization (EBITDA). Delta trades at 6.9 times EBITDA, and United 5.5 times.
Is American Airlines a buy?
To be clear, the entire airline industry is much healthier than it was heading into previous down cycle and all of the so-called “big four,” which includes American, Delta, United, and Southwest Airlines, have the wherewithal to withstand an extended downturn.
But American’s quest to catch up with its rivals could be further delayed if conditions do decline from here. We’ll know more this week when American announces first-quarter results and updates the market on its outlook for the rest of 2025, but for now investors are understandably cautious about the stock.
Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.
