J
Jimmy C. Corn
From "The Street.com..."
AMR Fights to Quell Bankruptcy Fears
Ted Reed
03/31/08
CHARLOTTE, N.C. -- American Airlines, the largest U.S. carrier, holds nearly $5 billion in cash, recently posted impressive quarterly unit revenue growth and in 2007 paid down $2.3 billion in debt. Even so, Wall Street seems to think that American Airlines parent AMR is a company in trouble, with a potential bankruptcy looming.
And shares, which traded Monday around $8.50, are scraping along near a three-year low. Market capitalization is just 10 cents to the revenue dollar, says FTN Midwest Securities analyst Mike Derchin, who adds: "A lot of investors see serious liquidity issues because they are skeptical about the revenue outlook in a recession." Standard & Poor's last week downgraded AMR's outlook to negative from positive, cutting short-term ratings to B-3 from B-2.
AMR's treasurer, Beverly Goulet, addressed the bankruptcy talk two weeks ago at the JPMorgan Aviation and Transportation conference and more recently in an interview with TheStreet.com.
The Burden of Liquidity
"I can't begin to figure out what is in other peoples' heads, [but] this whole perception is way overblown," she says. "We restructured in a different way than a lot of our peers have done, and we have competitive costs in regard to every aspect of our business except for labor costs, but that's really the only significant way we differ."
At the conference, Goulet answered a question about a potential liquidity crisis. "I said it's ironic to have people asking questions today on liquidity, when not long ago a lot of those same people were questioning why we were carrying so much cash, saying our cash levels were a drag on the company," she says.
"We have a lot of liquidity," Goulet says. "We've done a lot of balance sheet repair work over the last several years -- we've tapped equity markets, for instance, and we've made progress in unencumbering some of our aircraft, and the hard work we've done has left us well positioned to deal with high fuel prices and an economy that may not be a strong as we would like."
American ended 2007 with $11 billion in net debt (total debt minus unrestricted cash), down from $19 billion at the end of 2002.
To be sure, S&P says American has adequate liquidity, despite citing total debt of about $20 billion and the possibility of a $1 billion loss this year. And Avondale Partners analyst Bob McAdoo recommends the stock, saying: "The legacy airlines are not going out of business and they are not near running out of cash, [and] history has shown that patient investors -- who buy at these [market cap]/revenue levels -- generally see double-digit returns within the year."
Meanwhile, strong first-quarter revenue per available seat mile growth between 6.9% and 7.9% indicates that American has the ability to recoup some of its fuel cost increase.
So why the bankruptcy talk?
Fuel, Labor, M&A
First, the entire airline industry has problems. The Amex Airline Index (XAL), which includes AMR as a component, hit an all-time low of 23.49 this month. The index traded as low as 25.56 Monday. In general, investors worry that fuel costs are rising while demand for seats will slow with the economy.
Second, American's labor picture is not pretty. Among legacy pilots, American's are not only the best compensated and among the few who retained their pensions, they are also, seemingly, the unhappiest. Pilot leaders have called for 50% pay increases.
FTN Midwest's Derchin says pilot rhetoric may be intense, but pilots have nowhere to go. Given relatively high pay rates, they would lose in arbitration, and "the government will never permit a company the size of American to go on strike," the analyst says.
Third, American has largely been left out of merger speculation, which has benefitted other carriers' shares. In some ways, American wins if there is no consolidation, says consultant Robert Mann. That is because the most commonly discussed mergers would create broad domestic-international system combinations that "would take corporate customers, the people you really want to carry, from American," he says.
Finally, American is perceived differently largely because only it and Continental avoided bankruptcy following the Sept. 11 attacks. Instead, American reached an 11th-hour cost-cutting deal with its unions in the spring of 2003, as shares dipped to $1.25.
On occasion, that avoidance strategy is re-examined. In a November 2007 story, The Dallas Morning News noted that both labor and management "wear the avoidance of bankruptcy as a badge of honor."
Yet today, American "has unhappy employees, heavy debt and higher labor costs than most of its major competitors [and] doesn't get a lot of credit for having avoided the plunge into Chapter 11," the newspaper said. "What should be a happy memory instead is a complex subtext in increasingly acrimonious labor negotiations."
Says Goulet, "We restructured the company the right way: We've paid our debt, funded our pension plans, funded obligation to creditors, our employees are highest paid in the industry, and our equity didn't become worthless. That's what we are paid to do."
AMR Fights to Quell Bankruptcy Fears
Ted Reed
03/31/08
CHARLOTTE, N.C. -- American Airlines, the largest U.S. carrier, holds nearly $5 billion in cash, recently posted impressive quarterly unit revenue growth and in 2007 paid down $2.3 billion in debt. Even so, Wall Street seems to think that American Airlines parent AMR is a company in trouble, with a potential bankruptcy looming.
And shares, which traded Monday around $8.50, are scraping along near a three-year low. Market capitalization is just 10 cents to the revenue dollar, says FTN Midwest Securities analyst Mike Derchin, who adds: "A lot of investors see serious liquidity issues because they are skeptical about the revenue outlook in a recession." Standard & Poor's last week downgraded AMR's outlook to negative from positive, cutting short-term ratings to B-3 from B-2.
AMR's treasurer, Beverly Goulet, addressed the bankruptcy talk two weeks ago at the JPMorgan Aviation and Transportation conference and more recently in an interview with TheStreet.com.
The Burden of Liquidity
"I can't begin to figure out what is in other peoples' heads, [but] this whole perception is way overblown," she says. "We restructured in a different way than a lot of our peers have done, and we have competitive costs in regard to every aspect of our business except for labor costs, but that's really the only significant way we differ."
At the conference, Goulet answered a question about a potential liquidity crisis. "I said it's ironic to have people asking questions today on liquidity, when not long ago a lot of those same people were questioning why we were carrying so much cash, saying our cash levels were a drag on the company," she says.
"We have a lot of liquidity," Goulet says. "We've done a lot of balance sheet repair work over the last several years -- we've tapped equity markets, for instance, and we've made progress in unencumbering some of our aircraft, and the hard work we've done has left us well positioned to deal with high fuel prices and an economy that may not be a strong as we would like."
American ended 2007 with $11 billion in net debt (total debt minus unrestricted cash), down from $19 billion at the end of 2002.
To be sure, S&P says American has adequate liquidity, despite citing total debt of about $20 billion and the possibility of a $1 billion loss this year. And Avondale Partners analyst Bob McAdoo recommends the stock, saying: "The legacy airlines are not going out of business and they are not near running out of cash, [and] history has shown that patient investors -- who buy at these [market cap]/revenue levels -- generally see double-digit returns within the year."
Meanwhile, strong first-quarter revenue per available seat mile growth between 6.9% and 7.9% indicates that American has the ability to recoup some of its fuel cost increase.
So why the bankruptcy talk?
Fuel, Labor, M&A
First, the entire airline industry has problems. The Amex Airline Index (XAL), which includes AMR as a component, hit an all-time low of 23.49 this month. The index traded as low as 25.56 Monday. In general, investors worry that fuel costs are rising while demand for seats will slow with the economy.
Second, American's labor picture is not pretty. Among legacy pilots, American's are not only the best compensated and among the few who retained their pensions, they are also, seemingly, the unhappiest. Pilot leaders have called for 50% pay increases.
FTN Midwest's Derchin says pilot rhetoric may be intense, but pilots have nowhere to go. Given relatively high pay rates, they would lose in arbitration, and "the government will never permit a company the size of American to go on strike," the analyst says.
Third, American has largely been left out of merger speculation, which has benefitted other carriers' shares. In some ways, American wins if there is no consolidation, says consultant Robert Mann. That is because the most commonly discussed mergers would create broad domestic-international system combinations that "would take corporate customers, the people you really want to carry, from American," he says.
Finally, American is perceived differently largely because only it and Continental avoided bankruptcy following the Sept. 11 attacks. Instead, American reached an 11th-hour cost-cutting deal with its unions in the spring of 2003, as shares dipped to $1.25.
On occasion, that avoidance strategy is re-examined. In a November 2007 story, The Dallas Morning News noted that both labor and management "wear the avoidance of bankruptcy as a badge of honor."
Yet today, American "has unhappy employees, heavy debt and higher labor costs than most of its major competitors [and] doesn't get a lot of credit for having avoided the plunge into Chapter 11," the newspaper said. "What should be a happy memory instead is a complex subtext in increasingly acrimonious labor negotiations."
Says Goulet, "We restructured the company the right way: We've paid our debt, funded our pension plans, funded obligation to creditors, our employees are highest paid in the industry, and our equity didn't become worthless. That's what we are paid to do."
