American Airlines and Others Given Go-Ahead to Reduce Route Coverage

The Transportation Department informed 15 airlines late Friday that it will allow them to cancel flight service to about 60 cities where there is little demand for flights. However, no city will be left without service altogether.

The destinations are mostly in secondary markets that could be served by other nearby airports.

American Airlines (AAL), for example, will be permitted to stop flying to Aspen and Vail, Colorado, as well as Worcester, Massachusetts.

The Transportation Department stated that it reserved the right to reverse any decision, however, if it were to result in “inadequate capacity or connectivity” to a destination.

As part of the CARES Act, the federal stimulus package passed in March, any airline that receives federal assistance is required to maintain a minimum number of flights to locations that it had served before the pandemic. Thus, Friday’s announcement comes as a welcome relief to struggling airlines.

The outbreak of Covid-19 has wreaked devastation on the aviation industry. Passenger flight demand currently is just 5% of what it was at this time last year, though flight data shows demand trickling upwards of late.

Of the $50 billion in financial assistance for airlines, American Airlines received about $12 billion.  At the time, American Airlines CEO Doug Parker put out a video for investors in which he said, “I am confident that those funds, along with our relatively high available cash position, will allow us to ride through even the worst of potential future scenarios.”

Analyst sentiment on American, however, has been grim. J.P. Morgan analyst Jamie Baker recently wrote: “In our opinion, the margin for error for American management to navigate this crisis outside of the courts is growing uncomfortably thin (and dependent on factors outside of management control, i.e. duration of the virus, traffic recovery cadence, further government support)…”

After spending most of 2019 in the low $30’s, American stock is now priced below $10, closing on Friday at $9.70.  American has a Hold consensus, with 4 Buys, 5 Holds, and 8 Sell recommendations, and a 12-month price target of $13.92. Yet given American Airlines’ steep fall, that still represents $44% potential upside. (See American Airlines stock analysis on TipRanks).

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