American Airlines (AMR) is in an attractive area to start building a long term position. It's time for my contrarian view to kick in and take advantage of the potential upside that I expect to see from American Airlines. There is alot of negativity surrounding the company and the industry which mainly comes down to fuel cost. It is times like these that allow contrarian investors to take advantage of the overly pessimistic view, and pick up strong companies that will make it through the market cycle.
I have never been a big fan of the airline business model. It is a highly competitive business with tight margins. It does appear the selling may be overdone and is now providing long term investors a great opportunity to invest in this company turnaround. American Airlines are trading near the lows of the dot com bubble and financial crisis, but I don't view the current economic situation as that dire. I do believe the economy my slow but I don't see signs of another severe economic downturn coming yet.
Here are some highlights that I like about the American Airlines story:
- American Airlines is looking to turn into a more efficient company. American Airlines had a net loss of $286 million in the second quarter which had to do with the sharp increase in fuel costs. Fuel prices increased 31 percent year over year which drove $524 million of additional expenses.
- American Airlines plans to update its fleet, this will bring much needed savings going forward. American Airlines plans to purchase 460 narrowbody, single aisle aircraft from Boeing and Airbus. The purchases are for 200 Boeing 737 and 260 Airbus A320 aircraft. American Airlines also has the option to add additional features which will further enhance the fuel efficiency. These new aircraft offer a cost reduction of 35 percent in fuel cost reduction per seat versus the MD-80 and 12 and 15 percent fuel cost reduction per seat, respectively, versus the 757 and 767-200.
- American Airlines will spin-off AMR Eagle Holdings. This will unlock value for shareholders by allowing the markets to value each company separately. AMR Eagle Holdings will also be able to grow its business by being able to offer flight services to other mainline carriers. Carriers are reluctant to work with Eagle Holdings while it is combined with American Airlines.
- American Airlines reported revenues of $6.1 billion, which is an increase of 7.8 percent when compared to the same period in the previous year. American Airlines passenger yield, which represents the average of fares paid, increased 4.6 percent year over year in the second quarter.
- American Airlines now expects it full year mainline capacity to be up 1.9 percent versus 2010, with domestic capacity down 0.1 percent and international capacity up 5 percent compared to 2010 levels.
I'm bullish on American Airlines and I'm expecting a big move in the future. This is a long term play for me and I don't really expect a large payoff until the first delivery of new aircraft in 2013. American Airlines is heading in the right direction and doing what they need to do to stay competitive.
I plan to build into a position in the same way I outlined in my S&P 500: Outsmart The Next Sell-Off article.
I would like to start to build a position near the lows that were created after the dot com bubble bust and financial crisis. I would to make my first purchase around the $2.50 area if I could get it.
Note: None of my posts should be considered investment calls since this is not a signal service. Many people on this site have different strategies and different timeframes that might not be the same as mine. I provide readers with ideas which they may be able to utilize if it fits their own strategy and objective. I will not always start a position as soon as I write about it, I will often write about it because now it's on my watchlist. When I get the right trigger then I strike. I'm an active Investor/Trader with short term and long term portfolios. I may enter and exit positions at multiple prices without getting an opportunity to make an update on this website so be sure to follow your own strategies.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMR over the next 72 hours.