Will American Airlines’ share price gain elevation on Q2 earnings?

So far in 2020, the trajectory of American Airlines’ [AAL] share price has largely mirrored that of the wider aviation industry.

As the largest carrier in the US, American Airlines’ share price has set the precedent for the industry. While the peaks and troughs vary a little among the other players in America's wider airline sector, American Airlines’ share price dropped 63.15% between 21 Feb and 23 March as more and more flights were cancelled due to the coronavirus pandemic. After a brief rebound at the end of March, its share price reached new lows at the beginning of April.

More volatility followed before American Airlines’ share price finally bottomed out at $9.04 in mid-May — more than 70% off its 2020 high of $30.47.

But in early June, as restrictions around travel began to ease, an industry-wide rally helped American Airlines’ share price climb 82.8% in the first eight days of the month. This included its best ever day of trading on 4 June, with the stock climbing 41% in just one day.

But it soon became clear that American Airlines stock, like the wider industry, had been overbought. Up to 21 July, the share price has fallen 43.5% from that 8 June high.

What will the upcoming earnings reports mean for American Airlines’ share price?

Looking to earnings

Analysts are expecting American Airlines to report a big fall in sales and earnings-per-share compared with the same period in 2019. Zacksconsensus estimate is that the company will report a loss an EPS loss of $6.92 for the quarter and sales are estimated to be $1.48bn. These figures represent a year-on-year drop of 480.2% and 87.6% respectively.

If American Airlines can beat the consensus, it could it help build positive momentum. It’s worth noting, however, that American Airlines fell short of analyst consensus estimates for Q1 2020 — reporting a loss of $2.65 per share against an expected EPS for the quarter. This was 27.53% below expectations, according to CNN, while its reported sales of $8.5bn fell below estimates of $9.3bn.

A difficult road ahead

Looking further ahead, for Q3 analysts had expected a solid pickup in sales, but this could yet be scuppered by new US lockdowns and surging COVID-19 cases in the US which are likely to put a renewed dent in American’s bookings in later July and August.

“The airline is adding back more capacity than its peers, gambling on demand rebounding sharply. That could pay off if travel recovers through the summer and into the fall, enabling American to capture more share than United [Airlines] and Delta [Air Lines]. If demand doesn’t materialize, because of a second virus wave, however, it will pressure American’s already shaky liquidity position,” Daren Fonda writes in Barron’s.

Ahead of its earnings release, American Airlines announced on 15 July that it had begun the process of sending furlough and layoff notices to 25,000 staff while also confirming that it would be teaming up with fellow US carrier JetBlue. The partners This is aimed at preserving cash by filling gaps in schedules by allowing passengers to book itineraries that include flights from both airlines.

The pair said the partnership would "accelerate each airline's recovery as the travel industry adapts to new trends as a result of the pandemic." But, following the announcements, American’s share price fell 7.37%

A debt issue

American Airlines has a mounting debt problem which could cause serious problems during its recovery, even if the COVID-19 crisis eventually stabilizes.

Even before the crisis, the airline had far larger debt levels than its competitors and currently has a net debt level on $24.61bn. As Fonda points out, the company is putting itself in a precarious position by betting on a rebound that could not pay off.

The consensus rating among 20 analysts polled by CNN is to sell the stock, a rating held by eight analysts, while seven rate it hold. Of the remaining analysts three rate it a buy, and one each outperform and underperform.

The median 21-month share price forecast of $11.50 represents a nominal decline on 21 July’s closing price of $11.47.