Shares of AMR Corp. (AMR: Charts, News, Offers), the parent company of American Airlines, crashed over 33% at the start of the fourth quarter, hitting an eight-year low due to fears that a weakening economy have mortally wounded the struggling airline. Wall Street analysts now believe that American Airlines – the third largest air carrier in America – may declare bankruptcy in order to lower costs. The company also reported a slowdown in air travel and cargo. To top of the pain, the company acknowledged that “more than ten times” the normal number of pilots is retiring from American Airlines, leading shareholders to speculate that the pilots are either being coerced to retire early or are doing so out of fear regarding the company’s future.
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AMR shares have declined 75% since the start of the year, a considerably worse showing than the rest of the beleaguered airline industry, which declined an average of 41%. The reason being that American Airlines was the only major airline to post losses instead of profits, losing $286 million in the second quarter alone. The company has attempted to cut costs by replacing its older generation of aircraft with more fuel-efficient ones, and has announced that it would be selling its unprofitable regional airline, American Eagle, to the highest bidder. American has also attempted to pass the costs on to passengers with unpopular baggage fees, and severed relations with discount travel site Orbitz (OWW: Charts, News, Offers) in order to maintain tighter pricing control. American even cut employee wages and pensions to squeeze out a couple of extra cents per share. But none of these measures have worked, and the company continues to bleed deep in the red. For most market watchers, the next step for American is bankruptcy court. While restructuring wouldn’t affect customers – since flights would carry on as usual and frequent flier miles would stay intact – shareholders and bondholders would be wiped out.
American Airlines currently operates 3,400 flights daily, servicing 275,000 passengers daily from its major hubs in Dallas, Chicago, Miami, New York and Los Angeles. American Airlines is forecast to finish the third quarter with $4.2 billion in cash, but the company’s $9.8 billion in liabilities has caused many shareholders to question if AMR can pay off its bills. These days, American seems desperate for cash, borrowing $726 million last week at a high interest rate of 8.75% – which reflects poorly on the company’s credit worthiness. American’s liabilities are still smaller than Delta’s ($12.8 billion) and United Continental (UAL: Charts, News, Offers) ($12.76 billion), but both airlines are over twice the size of American. While the bankruptcy buzz caused a massive crash, not every analyst believes that bankruptcy would be the best option. Maxim Group’s Ray Neidl stated that “American does have big problems to solve, but they have plenty of time to do it.” He also said that the sell-off was “a tremendous overreaction.” David Bates, the president of the American pilots union, also dismissed the claim that the increased pilot retirements this quarter were attributed to the company’s weakness. He stated that it was due to a provision in pilots’ retirement benefits which allows them to “lock in” the value of investments by rolling them back 60 to 90 days prior to the summer crash. “A lot of it is pure economics,” stated Bates.
Lastly, the International Air Transport Association exacerbated an already volatile situation on Monday, with the declaring that the industry “may be headed for a downturn” due to a weakening economy. American Airlines was able to survive 2008-2009 without restructuring, but problems have considerably worsened since those dark days. If a rise in fuel prices is right around the corner, then the carrier could go down in flames. Investors picking up shares of AMR right now on weakness might get richly rewarded in a year, or watch their shares crumble into nothing as the company declares bankruptcy.
Other News About AMR
AMR stock plunges on renewed bankruptcy fears
AMR is in trouble, again.
AMR Resumes Pilot Talks as Stock Rout Shows Bankruptcy Concern
Pilots speak up regarding bankruptcy concerns.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
A spokesman said that Chapter 11 bankruptcy was not the company’s goal. http://bit.ly/oTm2Uk
The pilots didn’t retire because the airline is in trouble.
They retired because they could lock in their stock market pensions at the level they were at 3 months earlier – when values were stronger.
Do your research!
http://www.latimes.com/busines.....1199.story
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