AMR Shares Subject to Turbulence

DALLAS TheStreet) - In earnings release on Wednesday, American Airlines parent AMR ( AMR) said volatility in fuel prices and foreign exchange rates contributed to its third-quarter loss.

In recent weeks, however, few commodities have been more volatile than AMR shares, which were down as much as 9% Wednesday morning after the carrier missed Wall Street's consensus estimate. Shortly before noon, the shares had recovered more than half of the loss.

Unfortunately, American's continued losses and weakness in relationship to other carriers has left its shares exposed to rumors and doomsday scenarios.

"Given the recent rumors and speculation in the media, and the recent volatility of our company's stock price, it's clear that some have their doubts as to whether we will succeed in bringing our (labor) negotiations to a successful conclusion," CEO Gerard Arpey wrote, in a letter to employees issued Wednesday. "We continue, however, to have faith in the process, and in all the teams involved."

Most notably, AMR shares declined 33% on Oct. 3, as unrealistic fears of a near-term bankruptcy suddenly swarmed around the company. The shares opened that day at $2.82, then fell as low as $1.75, before closing at $1.98. By Oct. 12, they had fully recovered, reaching an intraday high of $2.92.

The next big scare came Monday, when investors seemed to react to the failure of American and its pilots to conclude contract negotiations over the weekend. Shares opened Monday at $2.99 and fell as much as 11% to $2.61 before closing at $2.76.

Which brings us to Wednesday. Shares opened at $2.81, then fell as low as $2.53, down 9%, when the company missed estimates. Shortly before noon, they had recovered to $2.71, down 4%.

Early Wednesday, American reported a third-quarter loss of $162 million or 48 cents a share, wider than Wall Street's consensus view for a loss of 41 cents a share. The company said a combination of volatility in both West Texas intermediate crude oil prices and foreign exchange rates took a $50 million, or 15 cents per share, bite out of its bottom line.

Analysts reacting to the news were neither overly concerned about the miss nor optimistic about the carrier's near-term outlook.

The 15 cents "was not reflected in our forecast and it appears that it was not fully reflected in the consensus forecast," wrote analyst Mike Linenberg of Deutsche Bank. He said the results were "generally in line but still disappointing."

Analyst James Higgins of Ticonderoga Securities also found the results to be "essentially in line," even though fuel costs were "slightly higher than expected," he wrote. American said fuel costs were $653 million higher than they would have been had prices remained at the same level as in the third quarter of 2010.

Higgins said Wednesday morning's weakness may have been driven by the lack of an agreement with pilots. "These talks have a life of their own," he said. "We are actually encouraged by what we're hearing of progress in them." He maintained a neutral rating on the stock.

S&P Capital IQ analyst Jim Corridore reiterated a hold rating. He had estimated a 33 cent loss. "We do not see a financial reason for bankruptcy in the next year, but lack of movement on a pilot agreement, pilot retirements and AMR's need to tap capital markets are risks that investors should be aware of," Corridore wrote. He slashed his 12-month target price to $3.50 from $6.

The fact is that American is addressing its problems.

Its cost disadvantage, while the exact amount is in question , is being addressed in contract talks and in convergence as other carriers' labor costs rise. Last year, it finally secured regulatory approval for an immunized trans-Atlantic joint venture, years after competitors Delta ( DAL) and United ( UAL) did. A gigantic aircraft order this summer addressed the problem of an inefficient fleet.

Addressing problems is not necessarily the same as solving them, but it is a start.

Additionally, Delta and United both merged with carriers that provided vastly enhanced opportunities in Asia and Europe, respectively. US Airways ( LCC) the only potential major partner left, cannot provide American with much in the way of international access, although it could provide a bigger domestic network.

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

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