AMR Gets Lift From Cost Controls

The latest quarter was the first profitable one, without items, since the fourth quarter of 2000.
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Updated from 9:30 a.m. EDT

American Airlines'

parent

AMR

(AMR)

rode improving revenue trends and cost controls to a second-quarter profit that was better than expected.

A brief early rally in the company's stock flamed out, however, as investors apparently caught wind of a downgrade from a Wall Street analyst.

The world's largest airline Wednesday said net income was $58 million, or 30 cents a share, up from $6 million, or 3 cents a share, a year earlier. On average, analysts were expecting a profit of only 15 cents a share, according to Thomson First Call.

Had it not been for a $31 million benefit for special items in the second quarter of last year, the airline would have lost money during that period. The latest quarter was AMR's first profitable one, without the benefit of special items, since the fourth quarter of 2000.

Shares roared 4% higher right after the bell, only to quickly swoon into negative territory. Wednesday afternoon they were trading 6 cents lower at $14.17.

Before AMR's earnings report, J.P. Morgan's Jamie Baker clipped his rating on the company's stock to neutral from overweight. The analyst, whose firm does and seeks to do business with companies covered in its research reports, correctly predicted the carrier would report a surprisingly good quarter. He added, however, that executives would probably offer bearish guidance for the second half of the year in a conference call scheduled for 2 p.m. EDT.

"With shares up 79% from their January lows ... and despite strong liquidity, we envision superior risk/reward elsewhere," Baker wrote in a note explaining his downgrade. AMR shares traded as low as $7.83 in January.

Revenue for the latest quarter totaled $5.31 billion, up 9.9% from $4.83 billion a year earlier and ahead of the $5.14 billion analyst consensus.

"The fact that we were able to earn a small profit despite record high fuel prices and a difficult industry environment speaks volumes about our people, who continue to meet our many challenges with determination and ingenuity," said Gerard Arpey, AMR's chairman and CEO, in a news release. "Working together, we have made significant progress in all aspects of the turnaround plan that we launched several years ago. That progress has become even more crucial, given record high fuel prices that continue to afflict the industry."

High fuel prices have been the bane of the airline industry for more than a year. During the second quarter, crude oil hit new records, ratcheting up the pain. AMR said it paid $434 million more for fuel during the quarter than it would have spent with last year's fuel prices.

But the carrier's cost-cutting efforts continued to bear fruit. AMR staved off bankruptcy in 2003 by getting workers to agree to $1.8 billion in annual wage and benefit cuts. Since then, it has tried to avoid more morale-sapping wage cuts with a program of collaboration between managers and workers aimed at improving efficiency. In the latest quarter, those efforts helped AMR lower unit costs, excluding fuel and year-earlier special items, by 4.3% from the second quarter of 2004.

AMR's revenue was bolstered by strong passenger traffic and the airline's restraint over its capacity. The combination allowed AMR to better fill its planes. At the same time, yield, which measures average fares, rose 1.9% from a year before -- the company's first quarterly yield improvement since the fourth quarter of 2003.

The company added to its cash coffers, finishing the quarter with $3.9 billion in cash and short-term investments, up from $3.5 billion at the end of the first quarter. That increase came even as AMR contributed $75 million to its traditional pension plans during the quarter, bringing year-to-date contributions to $213 million.

AMR wasn't alone in reporting strong quarterly results Wednesday. Rival

Continental Airlines

(CAL) - Get Report

soared past Wall Street estimates with its own results.