American Airlines Still Flying in Dust Storm (AMR)

American Airlines (AMR)

American Airlines parent company, AMR Corporation (AMR: Charts, News, Offers) reported a net loss of $505 million yesterday. The loss equated to $1.52 per share in the first quarter of 2010, significantly off the projected, estimated loss of $1.16 a share. One of the more ominous statistics about the earnings report is that this loss was greater than the lost posted during the recession a year ago when the carrier lost $375 million or $1.35 a share. Furthermore, American Airlines’ larger competitor, Delta Airlines, lost half that much during the same period.

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Stock Analysis

AA is the second largest airline in the world using the “passenger miles transported” standard. AA is still in business, but it is difficult to see how the carrier can return to profitability. There are numerous reasons why American is a shaky bet going forward.

AA was one of a very few airlines who did not declare bankruptcy after the terrorist attacks of September 11, 2001. The lack of bankruptcy restructuring kept high liabilities on the books and made it difficult for American Airlines to reduce creditor exposure. American Airlines saw $1.8 billion in debt mature during 2009 and another $3.5 billion in debt will mature by 2011. The greatest cause of the AA loss in Q1 is due to the significant uptick in fuel prices. Expenses related to fuel rose 14% during the quarter, up $200 million from the previous quarter. AA also saw a 5.7% rise in mainline unit costs – specifically capacity reductions and maintenance increase costs.

The airline industry as a whole still cites the economy as a reason for lower profits, because, while the country is technically out of the recession of a year ago, economic factors have not improved all that much. Big airlines are still struggling to increase passenger volume and AA is no exception. To add to the pressure, analysts believe that Southwest Airlines (LUV: Charts, News, Offers) is taking revenue from domestic competitors due to its “bags fly free” policy.

The Icelandic volcano threw yet another wrench into the proverbial American Airlines gears. The cloud of ash and debris closed European air traffic for most of a week. Early estimates show losses of nearly $1.7 billion for all airlines providing service to northern Europe. We do not know AA’s share of that loss, but the carrier was certainly exposed. Other losses sustain because of natural events include a $20 to $25 million loss due to the Haitian and Chilean earthquakes as well as the East Coast snowstorms in February.

AMR CEO, Gerard Arpey, summed up the past quarter, “While we made significant progress in improving revenue performance in the first quarter and enhancing our competitive position, we were simply unable to overcome the challenges of the global economic environment coupled with once-again escalating fuel prices … Moving forward, AA’s strategy includes strategic partnerships, especially with Japan Air Lines to improve service in the Pacific Rim.” AA also hopes to expand profits on European travel through joint business with British Airways and Iberia Airlines.

The lost posted by AMR is tempered somewhat by a special item that posted during this period, namely the devaluation of the Venezuelan currency. The adjustment to reflect the $53 million, one-time charge sets the American Airlines loss at $1.36 a share. There were also some AA maintenance projects that finished earlier than scheduled and came on to the books during this quarter. Future quarters, at least in the short term, will not include some of these costs, so there is some reason to believe that AA costs will not be as high going forward – another volcano certainly seems unlikely. However, these caveats are certainly not enough to convince anyone that AA is anywhere near posting a profit.

Other News about AMR Corporation:

• Cancellations in LAX – AA flights to Europe affected by volcano.
• Ash cloud fallout – Passengers stranded in Delhi, Mumbai.

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