AMR Corp. Has Nowhere to Go but Down

| About: American Airlines (AAL)

By Jack Barnes

In February, I made my case against United Continental Holdings Inc. (NYSE:UAL), owner of both United Airlines and Continental Airlines, saying high fuel prices would be too much for the company to bear. Well, the same is true for AMR Corp. (AMR), which is best known as the parent company of American Airlines, the fourth-largest airline in the world. The rising cost of fuel has put a squeeze on the company's margins, leaving it a hostage to higher oil prices. So let's "Sell" AMR Corp.

Sky-High Fuel Costs

AMR is headquartered in Fort Worth, TX. It was founded in 1930 as American Airways; however, service didn't start until 1934. American Airlines had a fleet of more than 620 aircraft as of December, providing airline service to 40 countries around the world.

The company currently is facing numerous headwinds as it tries to navigate a new economic reality. Those headwinds include:

  • Operating costs that are higher than those of its peers.
  • Increased pension obligation costs.
  • A large pile of debt.
  • Low revenue.

But the greatest detriment to American Airlines' business is higher fuel costs. The pain of higher fuel costs is particularly acute for American, which has a fleet of older aircraft that consumes more fuel per air mile seat than planes flown by competitors like Jet Blue (NASDAQ:JBLU). American Airlines last Wednesday reported a first-quarter loss of $436 million, or $405 million after one-time adjustments are considered.

Fuel costs accounted for 32% of the company's operating costs, consuming $1.8 billion in the first quarter. That's an increase of $366 million, or 25%, from a year ago. American Airlines also was hurt by winter storms that in the first three months of the year forced it to cancel 9,000 flights.

American can't change the weather, but it is trying to address some of its leveraged costs issues by upgrading its planes. The company plans to retire at least 25 of its MD-80 aircraft this year. These airplanes were designed and built in an era of cheaper fuel cost estimates.

That's good for the long term, but in the short term it means the company is getting squeezed between higher fuel costs and new aircraft replacement costs. So while American Airlines is increasing its revenue, its peers are still better positioned to profit from higher flight charges per seat. This leaves the company bleeding losses, with no expectation it will return to profit in the next year.

American Airlines has $4.5 billion in cash, but that is offset by $11 billion in debt to be serviced. This pile of debt leaves investors with a book value of minus $11.83 per share without even accounting for the company's first-quarter losses.

Sadly, as the last of the great legacy airlines, American Airlines may need to consider filing for bankruptcy in the coming months. That would help the company prepare for a future of stubbornly high fuel costs and shrinking consumer travel demand.

AMR Corp. stock is testing new lows as a matter of routine, sinking as far as $5.50 a share last week.

It's time to sell AMR Corp. and American Airlines and look to preserve our capital. The company is struggling with an old fleet, higher fuel costs, and an excessive debt load. No one expects the company to return to a profit anytime soon.

In fact, there is no reason to buy any airline company's stock until oil prices drop significantly. Until we see oil prices collapsing and airlines booking the fatter margins to their balance sheets, let's stay away from the sector.

Disclosure: None

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