American Airlines: A Cheap But Risky Play
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By now American Airlines’ (NASDAQOTH: AAMRQ.PK) bankruptcy saga is old news. Investors that follow the company know last month’s announcement was not a matter of if, but when. Company representatives cited high fuel costs as one of the explanations for the filing, and that was certainly part of it. But even more telling were the problems AMR incurred by not filing for bankruptcy (BK) years ago, as other major airlines did.
Cause and Effect
The result of not asking the court to forgive their debt was AMR carried the highest labor costs in the industry, by a wide margin. The airline was unable to negotiate with their labor unions as other airlines have via the bankruptcy courts. So in a very real sense, the expense associated with their own employees put them in this predicament. But they certainly don’t need to be reminded of that.
Just how high were the expenses? A glance at industry operating margins tells the story. Airlines operate on fairly thin margins to begin with, so these are particularly interesting numbers to compare how airlines stack up. Last quarter Alaska (NYSE: ALK), Delta (NYSE: DAL) and United (NYSE: UAL) led the pack with margins of 12.1%, 10.5% and 10.4% respectively. Not coincidentally, these are all profitable airlines.
With a Q3 operating margin of a paltry 0.6%, AMR was far behind the industry in this critical area, just as they had been for several quarters in a row. And now the once-proud industry leader has a market cap under $187 million and is trading like a penny stock. But that’s where the risky play comes in.
There are a lot of different possibilities as AMR goes through the judicial process. Divest themselves of their assets and disappear into the sunset is certainly one. Though that’s a scenario that leaves everyone worse off; creditors, investors and especially American’s 78,000 employees.
Another possibility is the re-emergence of AMR as a leaner airline with conservative plans to slowly grow again over time. This scenario is more likely than the former, but for investors willing to take a risk, there is less upside.
The most likely scenario is coming out of Chapter 11 and subsequently merging with another airline; US Airways is a name that has been bandied about (US Airways refuses to comment). Mergers and acquisitions are seen as the future of the airline industry in this country anyway. United and Delta grew through acquisitions, and so to will AMR; if they’re able.
If AMR does find a partner, dropping a few dollars on a $0.56 stock now could bear significant fruit down the road. At nearly 2 shares per $1, it wouldn’t take much to make the risk of investing in AMR pay off.
The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.