Through The Fly's Eyes: AMR Corp.
from Louis Jacobs of Theflyonthewall.com
American Airlines: Short-term Pain For Long-term Gain?
The aviation industry is highly cyclical, competitive and too dependant on external factors. While airlines can be profitable for one quarter, the next quarter can entail a bloodbath. AMR Corporation (AMR)’s American Airlines is the world’s largest airline in terms of passengers. While most airlines have recovered and normalized operations to sky-high oil prices and increased competition from popular low-cost carriers, American Airlines has been slow from the gate.
AMR’s stock has dragged compared to its competitors. While AMR’s stock is down considerably compared to it’s 52-week high ($25.74 vs. $41.00), United Airline’s parent corporation UAL Corp. (UAL)’s stock is $48.72, slightly lower than its 52-week high of $51. Fellow Dallas-based Southwest Airlines (LUV) stock is currently at $14.93, slightly lower than its 52-week high of $16.96. Finally, Delta Airlines’ (DAL) – which recently emerged from bankruptcy – stock is valued at $19.43, only a little lower than its 52-week high of $23.25.
AMR’s CEO Gerard Arpey’s strategy to focus on the long-term is partly to blame for the lag. United and Delta have focused their short-term strategies on aggressively expanding into higher yielding international routes, while American Airlines has halted expansion and focused on improving their balance sheet by prepaying aircraft debt.
Analysts have a different view. Standard & Poor’s Jim Corridore suggests that AMR lags behind because they’re the only major airline carrier than has never declared bankruptcy, thus they have been at a disadvantage and have more work ahead for them. FTN Midwest Securities Corp.’s Michael Derchin believes that AMR’s balance sheet strategy will work and maintains that the stock is a “Buy."
Another potential positive stems from AMR’s largest investor, the FL Group, owns 9.14% of the airline. The investment concern wants AMR to sell its popular frequent flyer program, which would unlock $4 billion in value to shareholders. Barron’s online suggests this stock is a buy because of this.
Further, while good balance sheets and diversification are paramount for successful businesses, the commercial airline industry is much different. External factors, such as high oil prices, affect an airline’s bottom line far more than paying off aircraft debt. AMR’s cost-cutting has been far more aggressive than its competitors, but airlines typically increase revenue by expanding their network, which AMR hasn’t done. AMR’s long-term focus is probably useless since it won’t help the company overcome short-term shocks or gain short-term revenue.