Nearly Worthless AMR Shares Spike Higher

DALLAS -- (TheStreet) - Shares of bankrupt AMR Corp. (AAMRQ.PK), the parent company of American Airlines, gained nearly 18% Tuesday, leading airline stocks even though they are all but worthless.

The stock traded up 8 cents to close at 53 cents, their highest price since Aug. 13. By contrast, shares in Delta (DAL) and United (UAL) were flat.

It is possible that some traders believe AMR shares may benefit from the possibility that American pilots will approve a tentative contract agreement that has been endorsed by the Allied Pilots Association. That agreement provides AMR stock for pilots. The miscalculation here is that pilots will receive newly-issued shares, not the ones that currently trade.

In fact, the existing shares have no intrinsic value and are certain to become worthless when the American bankruptcy case ends. This is what has happened in the cases of every other airline that has operated under bankruptcy court protection during the past decade.

The New York Stock Exchange delisted American, which had traded under the AMR symbol, on Jan. 5. Trading then moved to the OTC Bulletin Board (OTCBB) and Pink Sheets Electronic Quotation Service with the shares getting a new symbol, AAMRQ.PK.

At that time, AMR warned traders that "in most Chapter 11 cases, holders of equity securities receive little or no recovery of value from their investment."

Bankruptcy law is intended to enable companies to shed obligations and to become healthy again. The path to good corporate health includes the right to issue new stock, much of which goes to satisfy creditors. This requires cancellation of pre-bankruptcy stock.

Nevertheless, shares continue to trade until bankruptcy case ends. Traders presumably include both speculators who know the shares will become worthless and innocents who believe the shares will continue to provide ownership in the airline. Sometimes, parties from these two groups find one another.

In a few recent cases, post-bankruptcy trading was particularly active.

In the case of Northwest Airlines which filed for bankruptcy in 2005, a coalition of hedge funds contested the normal procedure of declaring shares worthless. In 2007, a group calling itself the Ad Hoc Committee of Equity Security Holders filed a motion seeking representation among creditors. The court appointed an examiner to study the matter, but the case was eventually dropped after the carrier agreed to pay attorney's fees.

In other words, the principal beneficiaries of the share price fluctuation were people smart enough to sell when the shares rose and the attorneys who got paid.

In the GM (GM) bankruptcy, shares of Motors Liquidation, a post-bankruptcy shell company, continued to trade. In some cases, investors complained they were duped by misleading online disclosures into believing those shares had actual value.

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-- Written by Ted Reed in Charlotte, N.C.

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