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What AMR Could Learn From Delta

It's simple: Analysts and investors want commitments to spinoffs.





(DAL) - Get Report

both reported profitable quarters last week, had strong unit revenue growth and suggested they could spin off their regional carrier operations to become leaner and more effective.

But the first- and third-largest airlines got vastly different receptions.

Analysts generally applauded Delta, whose new CEO spoke positively about consolidation. (Delta also signed a joint venture deal with

Air France


that appears beneficial.) Yet the reaction to AMR's earnings was at best mixed, partially because it seemed unenthusiastic about spinoffs.

For the week, shares of AMR, the parent of American Airlines, declined 7%, while Delta lost only about 1%.

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Perhaps because it has completed three questionable mergers in the past two decades, AMR has been cool to the merger talk that has pervaded the industry. It hasn't really warmed up to spinoff talk either.

Instead, CEO Gerard Arpey has said he wants to avoid costly financial transactions and maximize returns for long-term shareholders.

Last week, AMR said it's reviewing whether to spin off assets, with American Eagle apparently a leading candidate. Arpey declined to provide a timetable, while CEO Tom Horton preferred to carefully delineate the pros and cons for each possible transaction. The seeming reluctance to commit prompted JPMorgan analyst Jamie Baker to comment, during a conference call: "Maybe it's just me, but there doesn't seem to be much of a sense of urgency."

The next day, Baker reduced 2008 estimates and wrote in a report that the AMR call focused on "sluggish prospects for asset divestitures

and deteriorating fundamentals." He cited fuel costs, American's weak performance in London -- its primary European destination -- worsening relations with pilots and better values at other airlines.

Still, Baker maintained an overweight rating on AMR's stock. JPMorgan has a financial relationship with AMR that includes beneficial ownership of 1% or more of its shares. Baker or a household member also owns AMR shares.

Meanwhile, Goldman Sachs analyst Robert Barry wrote a report on AMR headed, "Expect shares to under perform as initial asset spin brouhaha fades," and cited many of the same concerns Baker did. He too reduced his estimates for 2008, as well as for the fourth quarter. Goldman Sachs has a financial relationship with AMR that includes beneficial share ownership, and it has recently performed investment banking services.

To be sure, AMR drew support from some, including Bob McAdoo of Avondale Partners. McAdoo rates the stock as an outperform. He says the six legacy carriers have underperformed the market this year despite improving earnings by more than $1 billion in the first six months. Year to date, the Amex Airline Index is down about 23%.

As for Delta, CEO Richard Anderson said the carrier is open to a new approach, noting that "obvious benefits could accrue from consolidation for our stockholders and our employees." Anderson raised the topic during opening remarks on his first conference call as CEO, telling analysts that "Delta, and candidly all of the major network carriers, are products of consolidation."

Later, during a media call, he explained that he made the remarks because he is asked so frequently about mergers. He said he doesn't differ from predecessor Jerry Grinstein, who was "opposed to consolidation that doesn't make sense for employees."

In fact, Grinstein has said that most deals are last resorts enabling carriers to survive when they would otherwise fail.

But why quibble? Analysts liked what they heard. "Delta's Earnings Call Increases Our Merger Bullishness," wrote McAdoo, while Bear Stearns analyst Frank Boroch titled his report "DAL's New Chief Says All the Right Things."