Did Boeing Back the Wrong Horse?

"American Airlines Shares Fall 33%." So blared the headline on page B1 of today's Wall Street Journal. So if it was a black day for AMR (NYSE: AMR  ) shareholders, at least they have the comfort of knowing they're "famous."

Today, these same shares are bounced back 20%, so clearly AMR shareholders have their hands full trying to figure the odds of a bankruptcy filing (AMR says it's bunk, by the way). I won't impose on them further with today's column. Instead, today I want to take a step back and consider what implications AMR's rumored imminent bankruptcy filing has for everyone else in the market -- beginning with Boeing (NYSE: BA  ) .

Losers ...
As you may recall, Boeing and AMR shared headlines back in July, when, to win part of AMR's business, Boeing agreed to a wholesale rethink of its strategy for the 737 airliner. AMR was in the market for a few hundred airplanes, you see. But it was leaning heavily toward super-fuel efficient A320 "neos" from Airbus. Boeing, not pleased with this prospect, shelved plans for a major overhaul of its venerable 737. Instead, it offered AMR a version dubbed the 737 MAX, equipped with new LEAP engines from General Electric (NYSE: GE  ) / Safran. The move helped Boeing win part of AMR's business.

I use the word "win" loosely, however, because it turns out this was not much of a victory. Winning AMR's business also required Boeing to cover the airline's costs through a lease financing arrangement. Boeing also seems to have given steep discounts from the list price of its jets -- by my calculations, on the order of 35% off. And if AMR now goes into bankruptcy, as some pundits are projecting, Boeing may not even get all the sales it bargained for. It may have changed its 737 strategy for nothing.

... and winners
That's not to say that no one benefits from AMR's troubles, however. Short-sellers, for example, are enjoying a field day. Also benefitting will be AMR's rivals, from giants Delta (NYSE: DAL  ) , US Airways (NYSE: LCC  ) , and United Continental (NYSE: UAL  ) , to discount liners like jetBlue (Nasdaq: JBLU  ) -- each of which faces a weakened rival in AMR. Each of these may enjoy an influx of customers as American Airlines loyalists worry that their frequent flyer miles may not be honored after an AMR restructuring, and choose to fly friendlier skies instead.

In other words, if you sold any of AMR's rivals in yesterday's panic, you made exactly the wrong call.

Fool contributor Rich Smith owns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 268 out of more than 180,000 members. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 04, 2011, at 9:16 PM, TheDumbMoney wrote:

    If one owns any airline stock at all, the main question one should be asking oneself is why, with everything else that exists in the market, one owns any airline stock at all (with the possible exception of LUV) as anything other than a short term cyclical play.

  • Report this Comment On October 04, 2011, at 9:17 PM, TheDumbMoney wrote:

    Incidentally, judging by the spam comment that precedes mine (if it does not get deleted), we are well on our way into the gold bubble.

  • Report this Comment On October 05, 2011, at 5:47 AM, Etonian8 wrote:

    If you want to look at an international airline stock, then I believe in going long on Singapore Airlines.

    Not because I live in Singapore, but because they are the clear innovators in the field, with customers willing to pay a premium to fly their airline. They have also been paying decent yields through their dividends

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