American Airlines: Are the Worries Overstated?

DALLAS TheStreet) -- AMR ( AMR), the parent of American Airlines, is strongly opposed to filing bankruptcy and has $4.2 billion in unrestricted cash, but bankruptcy chatter is still swirling around the company.

On Monday, a column in the Wall Street Journal discussed American's problems. The column concluded that the market for airline debt is healthy, that "American filing for bankruptcy out of choice is unlikely," and that other airlines are better investments.

Around 1 p.m., though, American shares began to tumble, with sharp drops triggering trading halts seven times in less than an hour. By the close, the shares had given up 98 cents or 33% of their value, falling to at $1.98. At one point, they traded at $1.75.

Before Monday, the shares had not fallen below $2 since March, 2003, when the company flirted with bankruptcy, but elected to remain the only major U.S. carrier never to have filed.

Shortly before the close, AMR issued a statement, saying that "While we generally don't comment on AMR's share price performance, there is no company-driven news that has caused the volatility in AMR shares today.

"Regarding rumors and speculation about a court-supervised restructuring, that is certainly not our goal or our preference," the company said. "We know we need to improve our results, and we are keenly focused as we work to achieve that."

Shortly after the close, veteran Standard & Poor's airline analyst Jim Corridore reiterated a hold on the carrier.

"While we view AMR as the financially weakest U.S. airline, it had $5 billion in cash/investments at the end of Q2," Corridore wrote. "Our Q3 forecast is for a loss of about $110 million, and we do not think the company has been burning through an unreasonable amount of cash. For this reason, we would be surprised by a bankruptcy filing in the next 12 months."

"Long term, we see AMR challenged by high costs, debt and pension obligations and a need to modernize its fleet," he wrote.

American, which has said that it has an $800 million annual labor cost disadvantage relative to competitors, is currently in labor talks with all of its major unions. It is unclear where the talks will lead -- the Association of Professional Flight Attendants has repeatedly questioned the validity of the numbers that American uses to say its labor costs are higher --but it is entirely conceivable that talk of a potential bankruptcy could have an impact on the tentative agreements that one day result.

American's most obvious problem is that Delta ( DAL) and United Continental ( UAL), its two principal competitors, went into bankruptcy in the middle of the past decade, reduced costs, and then merged with competitors to leap past American in the size of their global route structures. Now both have lower costs and bigger networks.

As far as actual news concerning the possibility that American could file for bankruptcy protection, the principal recent event came on Sept. 13, when Treasurer Bev Goulet addressed the question in a meeting with analysts.

Goulet specifically denied that American would seek Chapter 7 bankruptcy protection, but made no mention of Chapter 11.

Subsequently, American issued the statement it re-issued on Monday, that "a court-supervised restructuring ...is certainly not our goal or our preference." It did not deny the possibility of Chapter 11.

On Sept. 20, in a filing, American said its cash level had declined to $4.3 billion. In a weekly industry report on Sept. 23, Wolfe Trahan analyst Hunter Keay wrote: "We expect American's liquidity problems to worsen before they improve."

On Sept. 23, in an update to American pilots, the negotiating team for the Allied Pilots Association discussed the bankruptcy question.

"While AMR does not have an imminent liquidity crisis, the company is struggling to be profitable and the longer the enterprise loses money, the more concerns arise about where things are headed," the letter said, adding: "Bankruptcy is not inevitable. It is just one of several possibilities during the current economic downturn."

Another event prompting bankruptcy concerns is a recent upsurge in pilot retirements. In the past two months, 240 American pilots have retired, a result of specific aspects of their retirement plan. According to the Dallas Morning News lump sum withdrawal from a defined benefit plan would be more difficult if the carrier were in bankruptcy, while in the defined-contribution plan, pilots can take out their shares of American stock based on the stock value 60 to 120 days before the retirement date.

Like many investors, some of these pilots are getting worried.

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

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

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