American Airlines are soaring through the air on a 40% gain – how long will it last?

It feels like only yesterday that travel stocks were crashing. Warren Buffett sold off his airline stocks, and the entire consumer sentiment was down. In retrospect, it seemed logical that Airlines were down because the outlook for the travel industry was grim. However, our appetite for travel is rising. So much so that American Airlines (NASDAQ: AAL) climbed 41%, South West Airlines (NASDAQ: LUV) jumped 5%, and Delta Airlines (NASDAQ: DAL) surged 13% in a single day.

Why is American Airlines up?

AAL is up an astonishing 78% since its low back in May. Essentially the easing of restrictions is allowing American Airlines to service, more passengers per flight in  July (revenue restoration). Once we enter July more than 50% of America’s domestic routes will reopen. Considering only 20% and 25% of America’s domestic travel was open in May, and June July’s expectations are massive.

Also expected international capacity for July is 20%, which is a significant increase as international travel reached as low as 10%. The return to relative normality injected optimism into the market. In turn investors are expecting American Airlines will get back on its feet financially in the coming months. Hence, the penny stock like surge represents the positive outlook for the Airline industry and AAL.

Is the hype here to stay?

While the bears took AAL to the woodshed duringMarch and April, it seems the Bulls are taking over for June and beyond. The demand for travel should only increase as the restrictions ease off. The number of people who went through the Transportation Security Administration (TSA) in a single during the last week was over 300,000. Considering the number of daily TSA checkpoints reached as low as 97,799, I’d say the maths speaks for itself.

However, if America were to suffer a second wave of COVID-19 cases, we could see the bears wrench AAL back down again.

Is American Airlines worth the investment?

Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.

Short answer: Yes but, wait for a pullback today.

A 41% jump should not necessarily encourage you to jump on AAL. Considering the pre-market is only up 1.67% it seems the fuse is running out.

If I were investing, I would look for a dip in tomorrow’s sluggish like activity. Unless pre-market changes significantly,  I expect a slight sell-off during the day. I would be looking for support around $15 and if AAL market activity proves that, I would cement my position. While the explosive growth might run out, the underlying confidence in AAL is quite concreate at the moment. However, as we know, the outlook of the airline industry changes constantly. Thus, my exit strategy would be to sell once the investment makes a 20% profit. Because the last thing you want is to be greedy and try to ride AAL up and get caught in a sell-off. 

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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Written by Patrick Mcloughlin, Senior Manager of YIG.

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