It was only Wednesday when Bill Mann opined that Delta Air Lines (NYSE:DAL) looked like the next legacy carrier headed for Chapter 11 protection. His thoughtful comments made me ask, "Why own stock in a legacy airline?"
The Associated Press reported Thursday that the CEO of American Airlines' parent company AMR (NYSE:AMR) told financial analysts that the airline is making cautious plans for 2005. It makes you wonder what rapidly expanding and profitable Motley Fool Stock Advisor recommendation JetBlue (NASDAQ:JBLU) knows.
Profitability is such a problem at American that the company is exploring charging for on-board food and renting portable entertainment systems. Consider that JetBlue offers free entertainment at every seat. Is it good to differentiate American by charging for entertainment?
While American claims fuel prices are driving its problems, the real culprit is $22 billion in debt and aircraft leases. When rivals such as Southwest Airlines have more cash than debt, they have an automatic operating advantage.
Although American did raise fares $5 one-way yesterday, it is also reporting in its SEC filing that it is trying to refinance an $834 million line of credit because August revenues fell short of expectations.
Delta might be first to seek protection, but it looks like American is leaning to join United Airlines parent UAL (OTC BB: UALAQ) and US Airways (OTC BB: UAIRQ) in bankruptcy too.
Ask this simple question: What happens if higher and higher oil prices, or some other economic shock, hits the U.S. economy? If your answer is not that the legacy airlines financially implode, you are one of life's great optimists.
The issue is not whether we can let legacy airlines fail. Some have. Some more appear to be on the way.
The issue is, why purchase the stocks? Bankruptcy has a bad habit of converting debt holders into majority shareholders -- making previous shareholders shares virtually (if not actually) worthless.
With the companies so up-front about their problems, you would think trading volume would be low as investors avoided a bad situation that could get much worse. But that is not what is happening.
While investors obviously speculate that a booming economy, cost cutting, and raising prices will save the legacy airlines, the wise will hear the company warnings of trouble and stay away.
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As you should have guessed, Fool contributor W.D. Crotty does not own stock in any of the legacy airlines -- or any of the companies mentioned.
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