Bankrupt AMR: Cut Flights, Possible Merger

DALLAS TheStreet) -- The bankruptcy of American Airlines and parent AMR ( AMR) could mean fewer flights and fewer seats for passengers, even on some prestigious routes, as well as a turning point for airline investors. Competitors' shares rose, with the three remaining legacy carriers registering double-digit gains last week.

Passengers in a variety of markets could be impacted.
Passengers are likely to lose routes with an American Airlines bankruptcy, but Delta, JetBlue, US Airways and United are already seeing stock gains.

American's principal hubs in Dallas, Miami and Chicago should escape the bulk of the capacity trimming, and American may also be hesitant to reduce flying between the U.S. and the U.K., Ticonderoga analyst James Higgins says. But flight cuts should be steeper in markets outside the three major hubs, he says, and various analyst agree they see impending cuts in Los Angeles and New York -- which despite being keys to American's cornerstone strategy are not places where it dominates.

In May, in a controversial report, Avondale Partners airline analyst Bob McAdoo wrote that American loses $1 billion annually by flying too much in losing markets.

"More important than its costs are AMR's capacity decisions, its market selection and its unwillingness to halt or reduce flying in markets that are losers," McAdoo said. Those losers, he said, include many of the carrier's highest-visibility, most prestigious routes: New York to London; New York to California; Chicago to Delhi, Beijing and Shanghai; and Miami to Buenos Aires. The 10 worst markets lose $450 million a year, he said.

Similarly, American operates 10 daily flights in the New York-Los Angeles market, losing $70 million annually, and five daily flights in the New York-San Francisco market, losing $54 million annually, McAdoo wrote.

In its first week in bankruptcy, American has signaled modest capacity cuts via interviews with executives and in its filing, which shows 24 planes already retired to desert storage facilities and more aircraft lease rejections coming.

In a report issued Monday morning, Higgin wrote "We expect all U.S. airlines to benefit from AMR's surprise Chapter 11 filing, largely because we believe AMR will meaningfully reduce capacity,"probably in the 10% to 15% range.

What's bad news for passengers is good news for other airlines, with shares of JetBlue ( JBLU), perceived as the biggest beneficiary, rising 20%.

The gains came between the close on Dec. 28 and the close on Friday. During the period, the Standard & Poor's 500 Stock Index rose 4%. American announced its surprisingly quick filing before the markets opened Dec. 29.

Carriers' shares rose for different reasons. Legacies Delta ( DAL) and United ( UAL), whose shares rose 13% and 16%, are direct competitors to AMR for domestic and international traffic.

US Airways ( LCC), whose shares rose 13%, is a legacy competitor and a potential acquirer, while JetBlue is a competitor and a potential partner.

It is unclear whether the gains can continue, although US Airways announced a strong 13% gain in November passenger revenue per available seat mile on Monday before the market opened.

Also on Monday, Dahlman Rose analyst Helane Becker wrote that "United will benefit from the capacity reductions that AMR will probably make in LA and Chicago, where we believe the airline is unprofitable." She said Southwest ( LUV) "has major overlap with AMR in several markets, headed by Chicago and Dallas. Meanwhile, Alaska ( ALK), "precisely because it has so little overlap with AMR and will gain enhanced feed into and from AMR's network," Higgins wrote.

As for US Airways, which is often cited as the most likely American merger partner, S&P credit analyst Phil Baggeley said he does not believe that "US Airways' route network fits into American's current business strategy" because American is focused on major business markets while Charlotte and Philadelphia, US Airways key hubs, are "second-tier business markets."

"American may have less control over whether it merges, particularly if the reorganization process takes more than 18 months. US Airways could launch another hostile takeover bid for the bankrupt airline, or AMR's unsecured creditors' committee could become interested in a merger bid if it promised a better recovery on their claims," Baggaley wrote.

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

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

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