Publish date:

Why Wall Street Punished AMR

American Airlines'




, reported earnings today and on the surface, you would think the news would have made investors positively blissful.

Not. While the company reported record quarterly profit, its best-ever second-quarter load factor and earnings of $2.30 per share, ahead of analysts' expectations, Wall Street almost immediately started shedding shares of AMR after the earnings were released. The stock fell 5 3/4 to close at 83 1/2, down more than 6% on more than twice normal volume.

So, how come?

Domestically, the numbers for the airline looked good. In fact, you could say they looked great. But it is clear that problems internationally are bigger than had been anticipated. The major surprise here is that while we expected to see continued softness in Pacific routes, AMR floored us with the news that unit revenues were down 10% for the Latin American region.

Internationally, American saw yields drop 4%, and the load factor for the international sector was down 1.3 points. But these overall figures are somewhat deceptive, in that unit revenue was actually up 4% for European routes.

Latin America has been one of the most profitable segments of the American system for years, but things have changed greatly in the Central and South American markets over the last six months as both

Continental Airlines



Delta Air Lines

(DAL) - Get Report

have poured a lot of new capacity into these markets in an attempt to establish some kind of toehold in the face of American's dominant presence.

This is not to say that American lost money in Latin America this quarter. The carrier was still profitable for the region. And financial chief Gerard Arpey does not see AMR losing money in Latin America anytime soon. But in the short term, he does see capacity continuing to increase, which means continued pressure on pricing. His take on all the new capacity being thrown into Latin America by competitors? Arpey brushes aside the latest incursions as though they were nothing more than gnats buzzing about a well-oiled and "very efficient" machine.

"Over time, this capacity increase will be rationalized," Arpey said in the AMR conference call. "Efficient capacity will remain over time. That which is not will be withdrawn." Translation? Delta and Continental, as far as he is concerned, might as well make their plans now to retreat.

Why does Arpey feel that American has the edge in terms of "efficiency" in Latin America? Because of the "breadth and depth" of its network. I cannot argue with the man. As we have talked about here before, American has, by anyone's estimation, the strongest alliances of any airline in Latin America, including those with




TST Recommends




Aerolineus Argentinas

. Asked if American would consider cutting back on its current expansion plans for the region, Arpey said no: "It is full-steam ahead for our Latin American development."

However, Arpey also added that he was concerned about the recent cuts in gross domestic product growth forecasts for both Brazil and Venezuela. In what seemed like perhaps a note of measured concern, Arpey commented that the airline's concerns internationally are "not just about the problem in Japan."

Arpey sees available seat mileage growth for the carrier at around 6% for the next year, with about a 3%-3.5% growth in domestic growth. It is no secret that former Chairman and CEO

Robert Crandall's

long and tortuous negotiations with American's pilots cost the airline in terms of timely acquisition of airplanes. Or, as Arpey said today, "Yes, we have been -- let us say -- airplane constrained." I guess that is similar to being airplane-impaired?

This is the main reason why American's planned 6% ASM growth for 1999 is a bit more aggressive than numbers being projected for most of their competitors, most of whom have grown on a more regular schedule over the last few years.

But just an interesting thing to ponder: Could all those new planes in the pipeline for delivery in the next 12 months, a good number of which are designated for international service, prove to be a bit too much too late? In the case of Japan, for instance, American, as well as other carriers, is going to have to bite the bullet and start flying wide-bodied aircraft to Japan, whether the business is there or not, before the end of the year. Under the terms of the recently negotiated open-skies agreement, if the airlines don't fly the routes, they will lose the right to do so.

Sounds like kind of a difficult situation to me. And one that will put pressure on earnings.

I think Wall Street may be thinking the same thing.

Wing Tips Numbers

AMR earned $409 million, or $2.30 per diluted share, up from the year-ago quarter's $302 million, or $1.63 per diluted share. System yields rose 1.8%, unit revenues rose 3.4%, passenger revenues were up 4%, total operating revenues were up 6.4%, and pretax earnings were up 34% year over year.

Wing Tips Note

The FAA finally levied its

much-anticipated fine against

America West Airlines


late yesterday. Total fine assessed against the carrier -- $5 million. The settlement document is interesting to read. We'll talk more about all of this tomorrow.

Holly Hegeman, based in Dallas, pilots the Wing Tips column for

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site, at