Why Is American Airlines Rearranging the Deck Chairs?

American Airlines (AMR) recent announcement made one thing very clear.

--Sorry St Louis, it’s nothing personal, it’s just business!--

It doesn’t take a rocket scientist to conclude St Louis (STL) is the big loser in AMR’s newest business strategy. Picking the winners will be more of a challenge.

Thursday, AMR disclosed the destinations served from St Louis will drop from 39 to just 9 by next summer (this includes 10 destinations announced a few weeks ago). As a side-note, back in 2000, the year prior to AMR’s acquisition of TWA, there were well over 400 TWA departures to both US and International destinations.

In addition to the STL capacity cuts, AMR also announced they have improved liquidity by monetizing some unencumbered assets, arranged financing with GE for future aircraft and engines and will receive $1 billion from Citibank for advance credit card miles. All told the amount comes to $2.9 billion, of which $1.6 billion is for new aircraft financing leaving $1.3 billion as additional cash liquidity albeit debt will be increased by an equivalent amount.

AMR also exercised their long-standing option to start deliveries next summer of new 70-seat jets to be operated by AMR’s regional carrier, American Eagle. These new regional jets will be delivered with first class seating.

The loss for St Louis is being transferred to mostly Chicago and Miami hubs. The new regional jets will be scheduled to/from Chicago.

Year 2010 capacity is projected to be at or near 1% more than 2009.

So why make these changes and why make them now? The way I see it, the answers are rather easy.

Let’s look at the financial issue first. AMR’s cash and cash equivalent balance ending Q2 was down to $3.3 billion. In AMR’s conference call yesterday morning, they stated their Q3 cash balance after this transaction would be about $3.6 billion. Before this announced infusion, AMR’s cash position was the lowest amount since their 2003 reorganization and brush with bankruptcy.

Considering minimum cash requirements to satisfy financial covenants and the low revenue projections going into the typically money losing winter months, AMR had no choice but to add additional cash.

Taking so much capacity out of St Louis and moving it to Miami, Chicago and New York, was in my opinion, a smart thing to do albeit at the full expense of the St Louis community and the AMR employees working there.

Recently, Delta (DAL) arranged a quasi trade with USAir (LCC) to take most of LCC’s landing slots for the very restricted NY LaGuardia Airport. In addition, this fall AMR is likely to receive long sought after approval to move forward in their joint business venture (JBV) with British Airways (BAIRY.PK) and Iberia Airlines (IBRLF.PK).

Moving the STL capacity into Miami, Chicago and NY sets up future route planning options for the BA/IB JBV and adds some additional competition for DAL’s planned expansion out of NY.

Adding the new RJ aircraft in Chicago appears to be a direct response to United’s (UAUA) transition from larger –mainline- aircraft to regional carriers which now provide domestic passenger feed for their mainline operation. Should United face some of the long predicted financial problems, AMR will have the capacity in place to take advantage of –potential- problems with United’s solvency.

Overall, these decisions by AMR shore up their largest hubs and add more than enough liquidity to get through the winter months with very little added expense. Should the economy and overall airline industry improve, AMR will be in a stronger position to take advantage of any potential revenue growth.

Disclosure: The above opinions should not be used to determine the worth of any stock or investment. At the time of writing, the author and his family hold stock and derivative positions in AMR.

Comments

[Jim Packer:]

AMR and American Airlines are not the same thing as stated in the first sentence! In fact, AMR is trying to kill American Airlines while growing American Eagle. It is a sad ending to a once great airline. AMR is the organization that is made up of two distinctly separate airlines - American Airlines and American Eagle. Do not try to lump them both into one pot.

Sep 18 10:40 AM

[jetplandriver:]

In response to Packer's post, AMR, Eagle, and American Airlines are all one and the same, it's the pilot's union that for political and parochial reasons wants them separate-- which management is all-to-happy to oblige.

Some of us are old enough to recall that when the four American-owned carriers that made up Eagle were consolidated, triggering a union representation vote, the American pilots' union snobbishly said "the APA is for American [mainline] pilots-only." Yet they continue to complain to this day that their jobs are being taken by pilots they refused to represent when they had the chance.

Some of us remember when Detroit scoffed at 4 cylinder Japanese cars and said they weren't "real" automobiles too.

Sep 18 12:06 PM

[Mad Hedge F...:]

ont Fear of law suits prevents most analysts from publishing lists of short selling targets. But the Audit Integrity Co., a forensic accounting firm, regularly posts lists of public companies they believe may go bankrupt (see www.auditintegrity.com). Many of their picks reflect the accelerating shift from the old economy to the new economy. With offices in New York and Los Angeles, they look at leverage, market position, debt, and their own proprietary indicators. Another red flag are the legal shenanigans that companies resort to when coming out of a recession, like writing off large amounts of good will. In the media space CBS (CBS), Sirius XM Radio (SIRI), and Hertz Global (HTZ) are at risk. In the consumer field, Rite Aid (RAD), Macy’s (M), and Las Vegas Sands (LVS) made the list. Advanced Micro Devices (AMD) is the largest tech company to warrant scrutiny. Airlines, always a favorite of bankruptcy mavens, include American Airlines (AMR), and Continental (CAL). Sprint Nextel (S) tops the list of telecom companies. Better take that portfolio out and give it a good scrubbing.

Sep 18 12:53 PM

[Dave English:]

Interesting article. Publishing ethics question: in the disclosure you note "the author and his family hold stock and derivative positions in AMR." Good to know, but Is it also true -- and if it is should it be disclosed for a financial article -- that the author is actually an employee of AMR?

Sep 22 04:33 PM