AMR CFO: We Have Momentum; Analyst: We Still Expect a Merger

DALLAS -- ( TheStreet) -- Eleven months into its bankruptcy, AMR ( AAMRQ.PK), the parent of American Airlines, is consistently producing positive financial results and is picking up tailwinds from bankruptcy induced cost-cutting, fleet renewal and turnover in its flight attendant ranks.

"Our financial results are impressive given where we are in the (bankruptcy) process, and the momentum that has been built in the company goes far beyond that," said Chief Financial Officer Bella Goren, in an interview Wednesday following the release of AMR's third-quarter results.

American has largely based its battle against a merger with US Airways ( LCC) on the argument that it can restructure successfully on its own, and third-quarter numbers clearly show that is occurring. Nevertheless, most analysts believe a merger remains likely, either with or without American's backing.

In the third quarter, excluding items, American reported a net profit of $110 million. Including one-time charges related to the bankruptcy reorganization and other special items, the carrier had a net loss of $238 million.

Perhaps the most significant number, Goren said, is that the carrier is closing the net margin gap with its peers, reporting net margin of 1.7% for the quarter, up from negative 2.5% in the same quarter a year earlier.

"The majors are projecting a pretax margin decline versus a year ago of about a half percent," she said. "But we saw an improvement of over 4 points."

American's improvement is being fed by industry-leading unit revenue gains. For the quarter, the carrier reported that passenger revenue per available seat mile grew 4.3%. In September, American PRASM grew 4%, leading network peers for the sixth consecutive month, as Delta ( DAL) PRASM grew by half a percent, US Airways ( LCC) was flat and United ( UAL) reported a decline of 2.5% to 3%.

As revenue grew, costs fell. American said operating expenses excluding special charges declined 2.7% to $6.2 billion.

"We still are expecting a lot more," Goren said. "A lot of the restructuring savings and revenue are yet to come," since the impact of mid-September bankruptcy contract revisions isn't reflected in the third-quarter numbers. However, the company is already benefitting from reductions in aircraft rental charges, interest payments and management and support staff, she said.

Meanwhile, American is adding both new flight attendants and new aircraft. The carrier said Wednesday it will hire more than 1,500 new flight attendants during the next year, with hiring to begin in November and training to begin in January. American credited "the overwhelming response by current flight attendants to the company's recent voluntary separation options." About 2,250 flight attendants are leaving.

"This is a way for us to bring in a new work force and to help (remaining) senior flight attendants to quickly progress through the seniority list," enabling better schedules, Goren said. She noted that initially, however, new hiring will bring increased training costs, with training scheduled to begin in January.

Additionally, American is transforming its fleet. During the quarter, the carrier took delivery of seven Boeing 737-800s, bringing the year's delivery total to 19 aircraft, with nine more scheduled to be delivered in the fourth quarter. During the quarter, the number of 737s in the fleet will exceed the number of MD80s for the first time. Delivery of 59 new aircraft is scheduled for 2013. American expects to have the industry's youngest fleet by 2017.

On Tuesday, American creditors asked the bankruptcy court judge to extend the carrier's exclusivity period by a month to Jan. 28. "We believe it is largely a direct result of the pilots recently re-engaging with AMR management to negotiate a new collective bargaining agreement," Wolfe Trahan analyst Hunter Keay wrote, in a report issued Tuesday. "This does not change our expectation that US Airways and AMR will announce a merger while AMR is in bankruptcy."

The next key date in the saga comes at the end of the month, when a non-disclosure agreement expires. During the two-month NDA term, the carriers have reviewed each others' financial information on a confidential basis. Various possibilities exist when the NDA ends: US Airways could launch a hostile bid, the two carriers could jointly proceed on a merger, the NDA could be extended, or US Ariways could walk away.

"LCC's desire to merge with AMR is well known and we believe LCC will go to great lengths to execute a merger, but LCC won't wait around forever to be used as a tool to create negotiating leverage by labor or creditors," Keay wrote. "We also believe LCC probably has the means and the stomach to pursue alternative strategies."

Keay said the best way for investors to benefit from a merger would be to invest in Delta ( DAL)or United ( UAL).

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

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