Another Chapter 11 Written in a Sad Industry

To say I wasn't surprised would be a lie, but I thought it wouldn't be for another few months.

The market awoke to news this morning that American Airlines and American Eagle parent AMR (NYSE: AMR  ) had filed for Chapter 11 bankruptcy protection, making it the last of the major carriers to do so in an industry wracked by bankruptcies and mergers since September 2001. AMR believes its $4.1 billion of cash, as well as cash from ongoing ticket sales, will be enough to operate through the bankruptcy process. The airline also announced the retirement of current CEO Gerard Arpey, who will be replaced by Thomas Horton.

Business as usual for airlines
The primary reason for the bankruptcy filing was out-of-control labor costs that gave AMR a disadvantage over nearly all of its competitors. This $800-million-a-year cost disadvantage combined with the inability to restructure debt led to the Chapter 11 filing. Despite these debt costs, AMR plans to go ahead with its recent order of 460 new planes, including 200 new 737s from Boeing. These planes are needed to update its aging fleet, though it feels strange for a company to buy brand new jets while losing $4.8 billion over the past three and a half years, with losses expected to continue through at least 2012.

Not all airlines are created equally
Despite industrywide profitability problems, there are a few bastions of hope away from the major carriers. Last year marked the 38th consecutive year that Southwest Airlines (NYSE: LUV  ) has been profitable, a trend that is expected to continue this year. Allegiant Air (Nasdaq: ALGT  ) operates a regional airline focusing on leisure travelers, serving airports that have limited or no service from major carriers, and it recently reported its 35th consecutive profitable quarter. JetBlue (Nasdaq: JBLU  ) has returned to profitability after an $84 million loss in 2008, posting profitable years in 2009 and 2010.

What's ahead for AMR?
While I don't think this bankruptcy will eliminate American Airlines as a major carrier, the possibility exists. Other major airlines such as Delta Air Lines (NYSE: DAL  ) and United Airlines used bankruptcy protection to cut costs and acquired other bankrupt airlines, with Delta purchasing Northwest Airlines and United merging with Continental to become United Continental Holdings (NYSE: UAL  ) . Even US Airways (NYSE: LCC  ) got in the act when America West purchased the airline and retained the more widely known US Airways name.

It wasn't that long ago that American Airlines was the largest carrier in the world. I don't think that will happen again anytime soon, though it is possible for it to look for another airline to merge with.

These things take time to resolve, so if you want to follow the latest developments, add AMR to your free My Watchlist.

Fool contributor Robert Eberhard holds no position in any company mentioned. The Motley Fool owns shares of Allegiant Travel. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2011, at 4:03 PM, overley wrote:

    About the only way to make money on airlines stocks is to short them.

  • Report this Comment On November 29, 2011, at 4:08 PM, BetterThanGold wrote:

    thinking of buying LUV...dont know if its a good idea

  • Report this Comment On November 29, 2011, at 4:24 PM, johnson805 wrote:

    In chapter 11, if you have stocks in AMR, will they carry over once it exits chpt11? meaning, will they regain value?

  • Report this Comment On November 29, 2011, at 4:28 PM, XMFTheGuruEbby wrote:

    BetterThanGold,

    I personally would only add an airline stock to my portfolio if I couldn't find value elsewhere. That said, I have previously owned shares of Southwest Airlines and they are my favorite airline as a consumer. As mentioned in the article, it's on its way to being profitable for the 39th consecutive year, which is unheard of in most industries, let alone airlines.

    I would have to agree with overley on his point however. Airlines have been trending down for quite some time, and until consumers again have money to spend on travel they will continue to be harmed by fuel costs and other expenses.

    Thanks for reading!

    TMFGuruEbby

  • Report this Comment On November 29, 2011, at 7:10 PM, XMFTheGuruEbby wrote:

    johnson805,

    Per the AMR FAQ page, the current stocks are not guaranteed to hold the same value post-bankruptcy, and it is hard to say this early in the process what will happen to current shareholders.

    TMFGuruEbby

  • Report this Comment On December 01, 2011, at 11:04 AM, chopchop0 wrote:

    @ BetterThanGold

    Don't. The best decision I made was to sell LUV at $15.5/share before the collapse a few years ago after buying it for $14 and change earlier. The best in show in a crappy industry is still crappy.

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