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Grading AMR's Bankruptcy: Unit Revenue - A; Merger - Incomplete

DALLAS (TheStreet) -- It was one year ago Thursday that AMR (AAMRQ.PK) filed for bankruptcy protection, a bankruptcy that has gone pretty much as expected.

A September safety slowdown by pilots was clearly a bump in the road, and some of the conflicts with other unions has also been ugly. But in general, AMR has done what it was expected to do in bankruptcy: reduce costs and boost financial performance. It's hard to say that AMR's strategies have been altered during its year in court -- the carrier long ago announced plans to replace its aging fleet and to reap benefits from international partnerships, despite an implementation delay on the trans-Atlantic. Looking ahead, elimination of pilot scope restrictions should enhance the benefits available from both efforts.

Of course, the question of whether AMR will merge with US Airways (LCC) hangs over the American bankruptcy. Most experts expect a merger will occur and will represent the final step in the consolidation of the U.S. airline industry that began with deregulation in 1978. Afterwards, much of the sector's drama will end, said Maxim Group analyst Ray Neidl.

"It's going to become a boring industry, where they make money and have moderate growth," he said.

Neidl and CRT Capital Group analyst Mike Derchin said American has so far done well in bankruptcy.

"If you look at other airline bankruptcies and how the company has fared in holding onto customers after filing, American has done a better job than anybody," Derchin said, citing American's strong performance, relative to other carriers, in growing its revenue per available seat miles.

"I know I am in the minority in this, but I think the strategy of focusing on five core cities with strong business markets was the right strategy," Derchin said. AMR's cornerstone strategy focuses on Chicago, Dallas, Los Angeles, Miami and New York. Some analysts said the strong RASM growth is due primarily to cutting unprofitable routes and to comparisons with prior weakness. Nevertheless, both Derchin and Neidl give American an A for RASM performance and customer retention.

On the cost side, American has not gotten everything it wanted from its unions, but Neidl said that is common in bankruptcy. Derchin said US Airways' tentative contract agreements with American unions "made things a lot more difficult." Initially, American sought $1.25 billion in cost savings including $990 million from labor. So far, it has more than $500 million from the Transport Workers Union and the Association of Professional Flight Attendants. Pilots are considering a tentative agreement, with votes scheduled to be counted on Dec. 7. The carrier "hasn't been able to implement much of the cost-cutting yet," said Derchin, who gave American a grade of B on cost-cutting and a C on labor cost-cutting.

As for the merger, Derchin said bankruptcy put American ahead of where it might otherwise be. "Bankruptcy has forced them to take a serious look at a merger, and if a merger happens it will have the backing of labor, which is often against mergers, and of the creditors," Derchin said.

Imperial Capital analyst Bob McAdoo said it is too early to assess. Besides reducing labor costs, "American has taken some steps to get rid of routes that didn't make sense and it appears they are renegotiating rates on airplanes closer to market levels," he said. "But I don't know what the outcome is going to be. It's not clear what they are doing with Eagle, for instance I don't know if they are going to clean house or just do a halfway job."

McAdoo expects a merger. In a report on US Airways on Monday, he wrote: "We will soon learn the outcome of the deliberations regarding a possible US Airways takeover or merger with AMR Corp. We believe there will be a merger of these two airlines. In such a merger, we believe LCC holders will receive a premium for their shares, approximating high teens per share." US Airways shares currently trade around $12.90.

A year is not a long time in the airline bankruptcy world. In the history of major airline bankruptcies during the 2000s, United (LCC) was the least efficient, taking three years and two months. Delta's (LCC) 20-month bankruptcy was transformational: A relaxed regional carrier turned into an innovative international airline. The first US Airways bankruptcy took just eight months, but didn't lead to sufficient cost reductions. In the second US Airways bankruptcy, which took a year, two money losing regional carriers were combined to make a profitable national carrier.

What links them all is that each led to a merger. United, Continental, Delta, Northwest and US Airways all filed bankruptcy, reduced costs and then merged with other carriers to create stronger airlines. In the end, these comparisons will provide the basis for American's bankruptcy grade.

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

>To contact the writer of this article, click here: Ted Reed

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