An Upgrade Isn't a Signal to Buy

The ink from American Airlines parent AMR's (NYSE: AMR  ) bankruptcy is barely dry and already analysts are starting to re-evaluate airline stocks. This was led by Barclay's analyst Gary Chase upgrading the stock of US Airways (NYSE: LCC  ) amid rumors and speculation that the airlines would seek to partner up.

It takes time
A mere 72 hours after an aircraft bankruptcy might be a bit early in the process to start speculating about an end result. By my count, there have been six bankruptcies among major U.S. carriers since 2002. The average length of time spent under Chapter 11 in these instances was around 19 months:

Airline

Entered Bankruptcy

Exited Bankruptcy

Note

US Airways Aug. 11, 2002 Mar 31, 2003 First bankruptcy.
United Airlines Dec. 9, 2002 Feb. 1, 2006 Merged with Continental in 2010.
US Airways Sep. 12, 2004 Sep. 27, 2005 Acquired by America West; kept US Airways name.
Northwest Airlines Sep. 14, 2005 May 31, 2007 Acquired by Delta in 2008.
Delta Air Lines Sep. 14, 2005 April 30, 2007 At filing, four of top seven carriers under bankruptcy protection.
AMR Nov. 29, 2011 TBD CEO stepped down.

Source: Airlines.org.

I think it would be foolish to assume that a company as large as American, whose bankruptcy is the 12th largest among non-financial companies, can resolve its situation in the near term. Delta and Northwest, the last major airlines to file for Chapter 11 protection, took about 19 months to exit bankruptcy. AMR's goal is to emerge from bankruptcy slightly faster, in less than 15 months, according to AMR CEO Tom Horton.

It's been there before
US Airways CEO Doug Parker has been itching to merge with one of the big carriers for some time, and has reportedly approached Delta and United in the past about potential mergers. A merger between American and US Airways (currently third and fifth, respectively, in passenger traffic) could create at least the second-largest airline in passenger traffic in the U.S., possibly behind only United Continental (NYSE: UAL  ) and ahead of Delta Air Lines (NYSE: DAL  ) . Through a merger, American would add hubs in Phoenix, Philadelphia, and Charlotte, North Carolina (the last is a business-travel market because of a large amount of banks).

Ultimately, a merger between these two airlines could be more beneficial to US Airways. American could be positioned to thrive on its own after reducing its costs in bankruptcy. Labor costs could rise in the event of a merger of the two companies, in part because employees for both airlines are represented by different unions. American has a stronger reputation, ranking higher in the J.D. Power and Associates 2011 North American Airline Satisfaction Study than last-place US Airways.

Take a breath
If recent history tells us anything, airline bankruptcies can take some time to resolve. I'd be totally surprised if AMR emerges from bankruptcy or merges with anyone before the end of next year. I agree with my colleague Brendan Byrnes that it would be a bad idea to put any money into AMR right now. It's only a matter of time before the shares become worthless, and many investors currently holding shares would be smart to walk away. However, that does not mean you should ignore this sector altogether. To keep up to date on future developments with AMR and the rest of these airlines, add them to your Watchlist:

Fool contributor Robert Eberhard finds the history of the U.S. airline industry fascinating but holds no position in any company mentioned. Follow him on Twitter @GuruEbby. 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 (2) | Recommend This Article (4)

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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 December 03, 2011, at 1:38 PM, sdturbo wrote:

    U.S. will never let American air lines wipe off. It will

    be back with flying colors. This is done to show and

    get money from govt.

  • Report this Comment On December 05, 2011, at 5:16 PM, jetamerica wrote:

    As often occurs, airline pundits tend to ignore the 40 year history of Southwest airlines in their reviews of the industry. Southwest, unlike any other airline had been profitable every year since 1973, is the largest carrier in the USA in terms of passengers carried and has a market cap. greater than any airline in the world. It carries more passengers that American and more domestic passengers than either Delta or United, even after the various mergers.

    No discussion of the US airlines industry is complete without understanding the above. The serial CH 11's of ALL of the so called network cariers is however, a future threat to those airlines that do pay their bills. A USAIR deal would threaten the AA recovery and I doubt if the creditors would agree to it

    I hold positions in LUV, JBLU and ALK

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