Major Airlines Struggle While American Airlines Faces Possible Bankruptcy

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 |  Includes: AAL, ALK, DAL, JBLU, LUV, UAL
by: Farah Lalani

Starting the fourth quarter in red, major stock market indexes reached their lows for the year and put the S&P 500 on the verge of a bear market early on in the week. Highly dependent on Greece's financial crisis, the euro fell to a 9-month low against the dollar, and the yield on the 10-year Treasury note sank as investors piled money into lower-risk investments.

Traditionally, when the economy is uncertain, the airline industry is closely watched given that traveler demand is an indicator of peoples' faith in the economy. Additionally, when estimating airline earnings, analysts often track confidence level and job report numbers because travel is a discretionary expense.

For most companies, filing for bankruptcy is the last resort when all other debt and finance management alternatives have not worked. However, the gloomy economy may have pushed American Airlines (AMR) closer towards filing for Chapter 11.

American Airlines' stock price fell to an eight-year low amid bankruptcy rumors and worries over another recession for the U.S. economy. American Airlines closed down 33 percent on Monday at 1.98 and reached its low at 1.75 during the day.

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Other airline shares also fell on Monday amid speculation that American Airlines would seek bankruptcy. JetBlue (NASDAQ:JBLU) closed down 14.7 percent at 3.49; United Continental (NYSE:UAL) closed down 11.7 percent at 17.11; Delta (NYSE:DAL) closed down 11.3 percent at 6.65; Southwest (NYSE:LUV) closed down 8.6 percent at 7.35.

American Airlines' stock sank after reports surfaced that 200 pilots have retired in the last two months. Word around the market speculates that pilots may have been retiring earlier than usual to cash out on the stock and protect their pensions.

American Airlines struggles with high debt levels and underfunded pension plans. The highly competitive nature of the airline industry and volatile fuel prices add to the company’s worries. American Airlines lost $286 million in the second quarter alone, making it the only major airline that has lost money this year.

In comparison to airline peers, Southwest has the strongest debt to capital ratio at 37 percent. On the opposite end, American Airlines has the most weak debt to capital ratio at 161 percent. AMR’s high debt-to-capital ratio reveals its fragile financial strength signaling that the cost of its total debt (11.88 billion) may weigh down the company and increase its default risk.

Major Airline Competitors

Debt to Capital Ratio

AMR

161.16%

DAL

94.92%

JBLU

64.59%

UAL

87.50%

ALK

53.87%

LUV

37.01%

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To challenge the rumors on the street, American Airlines spokesperson said that bankruptcy is certainly not our goal or our preference. We know we need to improve our results, and we have a sense of urgency as we work to achieve that.”

In 2010 and through the first half of 2011, airline industry traffic statistics showed improving demand and revenues according to Standard & Poor’s. Investor sentiment on airline stocks could improve on signs that the U.S. economy is recovering and if oil prices retreat.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.