Shares of AMR Corp. ( AMR), parent of American Airlines, fell 6% on Tuesday after Citigroup Smith Barney downgraded the company and other brokerages lowered earnings estimates. Citigroup analyst Daniel McKenzie dropped his rating on AMR to hold from buy and cut his price target to $13 from $19, telling investors that the company would continue to "limp along" in the coming year as it tries to become more efficient and simplify operations. In reaction, shares of the carrier dropped 62 cents to $9.73, hitting an intraday low of $9.53, a level unseen since mid-August 2003. "We think it is prudent to become more cautious on AMR, given our view that UAL ( UALAQ.OB) and Delta Air Lines ( DAL) will ultimately end up with a cost structure materially lower than AMR within the next year, thereby leaving AMR at a competitive disadvantage," the analyst wrote in his downgrade. (Citigroup Smith Barney does and seeks to do business with the companies covered in its research reports.) In the analyst's view, with the Air Transportation Stabilization Board rejecting the application from UAL, parent of United Airlines, for a loan guarantee, United will now try to cut costs by as much as possible. And with Northwest Airlines ( NWAC) and Delta both working to cut costs in an environment where oil is at $40 a barrel, American's costs aren't likely to stay among the lowest of those of all legacy carriers. While McKenzie acknowledges that American's effort to further reduce costs by streamlining operations could provide upside momentum to earnings expectations, the analyst nonetheless lowered his 2005 earnings estimate by 50 cents a share. Other analysts were also lowering their estimates and price targets, with Prudential Equity Group analyst Dan Hemme cutting his price target to $11 from $17 and revising his second-quarter estimate to a loss of 12 cents a share from a profit of 28 cents a share. The analyst also lowered his 2004 estimate to a loss of $1.92 from a loss of 10 cents a share. Currently, Wall Street expects American to lose 3 cents a share in the second quarter and $1.80 a share in 2004.
"Despite the benefits from a major shift in labor costs implemented last year, American Airlines looks to have been hit with many factors that will detract from fundamental performance for the near and intermediate term," said Hemme, in his note. (Prudential has no investment banking business, and Hemme does not own shares of American.) The downgrades and sliding estimates are the latest signals that Wall Street is growing disillusioned with American, which has seen its turnaround plan run off track because of high fuel costs and a difficult operating environment.
Two weeks ago, John Darrah, the outgoing president of its pilots' union, said the company would have trouble surviving in the long term unless company management can find ways to compete with low-cost carriers such as Southwest Airlines ( LUV).