AMR Falls 6.6% After Morningstar Sees Bankruptcy in Future
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By Mary Jane Credeur - Oct 21, 2011 2:45 PM MT
- American Airlines fell 6.6 percent, the fourth decline in six trading sessions, after a Morningstar analyst said he concluded that the company “will succumb to bankruptcy.”
The shares dropped to $2.69 at 4:15 p.m. in New York, capping a day in which they rose as much as 2.4 percent and fell as far 10 percent. Labor costs put Fort Worth, Texas-based AMR at a disadvantage to peers, and the carrier’s “viability is in jeopardy,” Morningstar’s Basili Alukos said in a report today.
AMR has been buffeted this month by intraday stock plunges of as much as 41 percent on speculation that it will seek court protection after annual losses that began in 2008. The company reiterated today that filing for bankruptcy isn’t a “goal or preference” as it seeks to rework union contracts.
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There is no immediate bankruptcy concern,” Micheal Derchinan, analyst at CRT Capital Group LLC, said in a telephone interview. “They have plenty of cash and ways to borrow more, so bankruptcy is not something we have to worry about at the moment.”
AMR ended the third quarter with $4.3 billion in unrestricted cash, and could do a forward sale of frequent-flier miles or borrow against planes and spare parts next year when those assets are freed up, said Derchin, who is based in Stamford, Connecticut. He rates AMR as “fairly valued.”
Shares, Credit Swaps
Today’s decline for AMR was the worst in the Bloomberg U.S. Airlines Index, which dropped 1.2 percent as seven carriers fell. AMR has plunged 65 percent this year.
Investors’ perception of AMR’s creditworthiness improved today, as contracts protecting against a default for five years eased 1.87 percentage points to 56.1 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $5.61 million initially and $500,000 annually to protect $10 million of AMR’s debt.
Management at American is working to improve financial results and reach new labor contracts with pilots, flight attendants and other employees, said Sean Collins, a spokesman.
“Bankruptcy is not our goal or preference,” Collins said in a telephone interview. AMR and the APA recessed contract talks late yesterday and plan to resume bargaining on Oct. 24. Pilot unions are considered a bellwether in industry labor negotiations. Unlike peers including United and Delta, AMR didn’t reorganize under Chapter 11 bankruptcy court protection in the past decade, so its costs are higher, Collins said.
Morningstar’s Alukos, who is based in Chicago, said in his report that staying out of bankruptcy left AMR “unable to cleanse its excessive cost structure,” and that the company won’t be able to pull off a turnaround.
CRT Capital’s Derchin said AMR’s situation is “tough, but fixable.”
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Management’s focus is not on bankruptcy,” he said in the interview. “They would view that as a failure.”
To contact the reporter on this story: Mary Jane Credeur in Atlanta
Bye Bye---General Lee