Is Another Airline Headed For Bankruptcy?

| About: American Airlines (AAL)
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By David Berman

No one ever said that airline stocks were easy-money investments where you can just sit back and watch the profits flow. Hyper-sensitivity to fuel costs, economic conditions and intense competition have always made them prone to occasional booms – and frequent busts.

Example: AMR Corp. (NASDAQ:AMR) The parent of American Airlines didn't participate in Friday’s stock market rally, and no wonder: Morningstar analyst Basili Alukos argued that the company is facing a bankruptcy threat, which of course would render its shares worthless.

“After unearthing new liquidity information from comments made in the American earnings call yesterday afternoon, we now question AMR’s ability to continue as a going concern,” he said in a note.

In that call, AMR said that it had no unencumbered assets on its balance sheet, confirming Mr. Alukos’ earlier suspicions. Yet, the company must repay about $1-billion (U.S.) in debt in 2012, followed by another $1-billion debt repayment in 2013.

“Given AMR’s strained credit metrics – we rate the firm a CCC – we doubt a willing investor would loan the company money without requiring collateral backing,” he said. “Additionally, AMR is contractually obligated to contribute $560-million to its pension plan next year.”

Meanwhile, cash is dwindling. Mr. Alukos expects its cash balance to fall at least 43 per cent next year if the company remains cash-flow neutral.

“Unless AMR receives a substantial cash infusion or earns loan forbearance, we believe the company will eventually succumb to financial distress,” he said. “As such, we are lowering our uncertainty to low, since we are certain AMR's shares would become worthless in that scenario.”

AMR shares have been reflecting a dour outlook, falling 66 per cent this year. However, you can see why traders might take a sunnier view on it: The shares surged about 50 per cent after the broader stock market began to recover after hitting a bear market low earlier this month.

Disclosure: None