AMR's Bankruptcy May Harm Airline Stocks

Includes: AAL, ALK, DAL, LUV, UAL
by: Sammy Pollack

Many pundits have argued that the bankruptcy of American Airlines parent, AMR Corporation (NASDAQ:AMR), bodes well for other stocks in the industry. These airlines include Delta (NYSE:DAL), U.S Air (LCC), United Continental (NYSE:UAL), Jetblue (NASDAQ:JBLU), Southwest (NYSE:LUV), and others. In contrast to this thesis, I believe that the AMR bankruptcy is a negative event for the other airlines. Past performance tells us that bankruptcies in the airlines industry do little to help other competitors.

Firstly, AMR's bankruptcy shows what a fragile state the airline industry is truly in. The loss of confidence in AMR debt led to a situation where AMR could no longer finance itself. While no other airlines are in quite as bad a situation as AMR was, these other airlines have significant amounts of debt that need to be rolled over in the coming years. For example, Delta (DAL) has over 14 billion in debt outstanding. United Continental (UAL) has over 13 billion in debt outstanding. While both UAL and DAL are currently making money, this all could change quickly if the global economy continues to slow and oil remains elevated.

While some argue that AMR's downsizing will lessen competition in some key markets, there is another aspect of the new AMR that is being overlooked. When AMR emerges from chapter 11, the company will be a much more competitive force. Without high labor and debt cost, AMR will essentially have a major advantage over other carriers such as LCC, DAL, UAL, JBLU, and LUV.

In the end, AMR's bankruptcy might do other airlines more harm than good. After all, this was one of the only major airlines not to enter bankruptcy, look how it turned out for AMR!

Delta entered bankruptcy in 2005. United filed for bankruptcy in 2002. US Air has gone bankrupt twice, in 2002 and 2004. Northwest went bankrupt in 2005. Somehow, these major bankruptcy filings did nothing to help AMR become stronger. In fact, the advantage that these other carriers gained probably led to AMR being forced into bankruptcy now.

The AMR bankruptcy will most likely have the same impact over the long term for the other airlines that remain.

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