American Airlines Stock Slumps as Investors Get a Dose of Reality - Motley Fool

American Airlines (NASDAQ:AAL) was a huge beneficiary of the “dash for trash” that began about a month ago. Speculators snapped up American Airlines stock along with other stocks that had been crushed by the COVID-19 pandemic, with no regard for business fundamentals or the companies’ recovery prospects.

The surge in speculation has tangibly helped American Airlines: Increased interest in the stock enabled the company to bolster its balance sheet with an equity and convertible debt offering this week. That said, sentiment alone can’t fix what’s wrong with the full-service airline right now. Investors are starting to realize just how challenging a turnaround will be, causing the bubble in American Airlines stock to deflate.

AAL Chart

American Airlines Year-to-Date Stock Performance, data by YCharts.

Indeed, while raising equity and convertible debt was the right move, it will significantly dilute existing shareholders. Meanwhile, American Airlines’ balance sheet will remain weak, driving up financing costs and limiting the company’s future flexibility.

Shareholder dilution begins

In recent months, American Airlines has borrowed money to fund near-term cash burn. However, while this tactic worked in the short term, American Airlines entered 2020 with the worst balance sheet of any U.S. airline. As a result, it is already running low on collateral to support future debt issuances but still has significantly less liquidity than peers.

Considering that the number of confirmed COVID-19 cases has started rising again in many parts of the U.S., airlines can’t count on a rapid recovery in air travel demand. That made it important to capitalize on the rebound in American Airlines’ stock price to raise cash in a way that doesn’t require collateral.

On Tuesday morning, American Airlines confirmed that it had priced an offering of 74.1 million shares at $13.50 per share. It also sold $1