AMR: A Ghoulish Trick

AMR (: AMR) was trading at $12.90 on Oct. 27.

This year, American Airlines parent AMR has treated shareholders to a 12-fold return from its 52-week low of $1.25. But shareholders should beware, for this impressive rise from the ashes is a mere phantasm.

The vampire of debt is sucking this company dry. With $13.2 billion in total debt, AMR narrowly missed the ghostly halls of bankruptcy in 2003. Was it a nightmare, or just good memory, that reminds AMR shareholders that they bought airline TWA out of bankruptcy in 2001? Did those spoiled goods help spoil the entire pumpkin patch?

Comparing AMR to peer Delta Air Lines(NYSE: DAL) and Wall Street darling JetBlue Airways(: JBLU), you get the creepy feeling that all is not well with American Airlines.

        AMR       Delta     JetBlue
Revenue          $17.30B    $13.30B    $0.64B
EBITDA           -$1.41B     $0.02B    $0.19B
Total Debt       $13.26B    $12.30B    $0.76B
Cash              $1.83B     $2.82B    $0.27B
Sept. Load Factor  66.7%      67.8%     80.2%
2002 Q4 Cost/Mile $0.111     $0.106    $0.063
Seat Spacing      33-35"     32-33"    32-34"
Market Cap        $2.10B     $1.60B    $4.36B

AMR, with 27 times the sales of JetBlue, casts a big shadow. That size does not mask the ugly fact that AMR's operating cost per mile is 76% higher and its load factor -- the percentage of available seats it sells -- is 13.5 points lower. The market treats shareholders of JetBlue to a market capitalization that is 100% higher than AMR because its operations look to be a long-term winner.

Delta has scary-high debt, but -- with a slightly higher load factor and 4.5% lower operating costs -- it managed to break even on an EBITDA basis.

The only good news for AMR shareholders is that they do treat their customers to up to 35 inches of space from seat-back to seat-back.

With the stock up so much, has AMR passed the graveyard on its way to recovery? In the latest quarter it had net income of $1 million -- barely avoiding the nightmare of another loss.

If shareholders are groaning over the company's inability to produce monster results, CEO Gerard Arpey doesn't sound too happy either. "The third quarter is a peak season for the airline industry, and under normal circumstances, we should be doing much better at this time of year than simply breaking even."

Arpey did identify the boogeyman. "Overall, the revenue environment is disappointing, and is negating much of the progress being made in lowering AMR's costs. This makes all the more important the cost principles of AMR's turnaround plan, aimed at lowering the company's costs so it can compete effectively in an industry marked by ever-expanding low-cost competition."

What is not clear is how AMR plans to fight the low-cost phantom while its cost structure is so high.

Although today's stock price is a fraction of its January 2001 peak of $43.94, today's low-cost competition has worked magic to reduce costs and make profits. The devil is in the details, and AMR has yet to show if it is more than a walking zombie.

W.D. Crotty does not own any of the stocks mentioned in this article. He can be reached at HawaiiFool@hawaii.com.

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