News Column

AA Stock Drops Sharply as Shareholders Fear Bankruptcy

October 4, 2011

D.R. Stewart

American Airlines

Shares of AMR Corp., the parent of American Airlines, plunged 41 percent, to $1.75, before closing Monday at $1.98 -- down 98 cents, or 33.1 percent -- as investors fled the stock, fearing a bankruptcy filing, analysts said.

"It could happen anytime now to the next six months," said Robert Herbst, airline analyst and consultant with "It's better than a 50/50 chance AMR will have to restructure through the bankruptcy process to remain competitive."

High operating costs, a slowing economy and sluggish travel market, dwindling cash reserves and $3 billion in debt payments due by 2014 are some of the obstacles AMR is struggling against, industry officials said.

Herbst and other industry observers said the nation's third-largest airline could survive outside bankruptcy if it could lower its $800-million-a-year labor cost disadvantage with competitors or find a merger partner.

Neither alternative seems likely, officials said.

American, the only major airline that didn't restructure labor costs and jettison pension benefits in bankruptcy after 9/11, has been negotiating new labor contracts with its unionized pilots, flight attendants and mechanics for several years.

The negotiations show so little progress that federal mediators walked away from contract talks last week.

In 2003, the labor groups agreed to $1.6 billion a year in wage and benefit concessions to keep American from a bankruptcy filing.

Now, the workers are not in the mood for further concessions, spokesmen say.

"Some of the unions would agree to some cuts in compensation and benefits, but there is a lot of bad blood between management and labor," said Fred Russell, CEO of Fredric E. Russell Investment Management Co. Inc. in Tulsa. "It may be in everyone's interest to come to some type of settlement, but it's difficult for a line worker to think about concessions when they see executives taking stock options."

In the second quarter, AMR reported a net loss of $286 million as fuel costs rose $524 million above the same quarter a year earlier. It was the fifth net loss in the last six quarters for the company.

AMR's options are narrowing. It has about $4.7 billion in cash, down from $5.6 billion at the end of the second quarter.

It's long-term debt is estimated at more than $17.1 billion, and the carrier in July committed to a $13 billion order for new aircraft from Boeing and Airbus SAS -- a deal AMR was nearly forced to make because its aging fleet of MD-80s are causing fuel costs to soar, industry analysts said.

Vicki Bryan, senior high-yield analyst at Gimme Credit, downgraded AMR's credit score Monday from "stable" to "deteriorating."

"AMR's prospects seem more precarious as the economic recovery stalls and travel demand softens," Bryan said in a research note. "As we expected, AMR is fast becoming an airline without dominance in any market niche -- it is losing market share to larger peers which are claiming an increasing share of more lucrative business and international travel, and to leading low-cost carriers able to maintain a dramatically lower cost structure."

Herbst, a former American pilot, said AMR's labor costs are 31 percent to 32 percent of operating revenue compared with labor costs of 21 percent to 24 percent of operating revenue at United Airlines, Delta Air Lines and US Airways -- all of which canceled union contracts through the bankruptcy process.

"In my opinion, labor has every incentive to find a solution -- pilots, flight attendants and mechanics sitting down and finding a way to remain cost-competitive -- but it's almost past the point of no return for that to happen," Herbst said.

The stakes are huge for Tulsa, where American employs 7,000 people at its Maintenance & Engineering Center, its largest maintenance, repair and overhaul base, and for Dallas/Fort Worth, its largest hub and corporate headquarters.

Andy Backover, an American spokesman, said a Chapter 11 bankruptcy filing "is certainly not our goal or our preference."

"We know we need to improve our results, and we have a sense or urgency as we work to achieve that," Backover said.

In response to reports that a higher-than-usual number of pilot retirements indicate an impending bankruptcy filing, American's Allied Pilots Association said Monday its financial advisers have indicated the airline does not face any immediate liquidity crisis and possesses sufficient cash reserves.

"Last week's announcement by American Airlines that the carrier would offer aircraft-backed 10-year enhanced equipment trust certificates for $726 million, along with an additional offering for $232 million, indicate a continuing ability by the airline to refinance debt and maintain sufficient liquidity, which is good news," the Allied Pilots Association said. "It's clear that American Airlines would likewise benefit from good news about long-running contract negotiations with its represented employees.

"To that end, we remain focused on intensive bargaining with management, with the goal of reaching agreement on a new collective bargaining agreement in the near future that benefits both the airline and its pilots."

More than 76.4 million AMR shares were traded Monday, nearly seven times its average daily volume of 11.7 million shares. A decade of AMR Corp.'s share price roller coaster The high and low prices of AMR Corp.'s shares over the last 10 years:

2011: $8.98 and $1.75. 2010: $10.16 and $5.96. 2009: $12.29 and $2.54. 2008: $16.18 and $4.41. 2007: $40.66 and $14.03. 2006: $34.10 and $18.76. 2005: $22.71 and $7.83. 2004: $17.38 and $6.49. 2003: $14.90 and $1.41. 2002: $29.05 and $3.15. 2001: $43.75 and $16.49.

Source: AMR Corp. annual reports on file with Securities and Exchange Commission.

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Source: (c)2011 Tulsa World (Tulsa, Okla.) Distributed by MCT Information Services

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