American Airlines (AMR)

American Airlines CEO Arpey is failing to hold the reigns tightly on his company. All of Americans work groups are operating with out contracts, creating instability in the work force. Americans failure to resolve its labor contracts in a timely fashion is impacting their bottom line on a daily basis. Executive managers have lost site of their customers, product, and employees. AMR will not rise to the challenge.

American's fleet had an average age of 14.7 years in June 2008, making it one of the oldest fleets of the major airlines.^[1] Because of this, American will have to either pay higher maintenance costs for its aging planes or invest heavily in new aircraft. Additionally, AMR will have trouble finding buyers for its old airplanes in a struggling economy. As a result, the company will be at a competitive disadvantage and be unable to operate optimally until its fleet is a bit younger (which will cost a lot of money) - things are going to get worse before they get better for AMR.

In 2007-2008, rising oil prices wrought havoc on AMR's profitability. Because of these increasing costs, American entered into hedging agreements for most of its fuel at prices well over $100 per barrel. However, after July 2008, oil prices have declined steadily, reaching less than $45 per barrel in January 2009.^[1] As a result, American was hurt by the flipside of rising oil prices - it lost money from overvalued hedging contracts. In Q3 2008 for example, AMR lost $360 million primarily because of the declining value of its hedging contracts as fuel prices plummeted. None of this bodes well for AMR as oil price volatility will probably remain throughout 2009.

AMR has $5.3 billion of debt maturing between 2009 and 2011 including $1.8 billion due during 2009 alone.^[1] Unfortunately for the company, it looks as though the credit markets during that period will be very tight and AMR will have a very tough time paying off its debt. This concern caused Fitch Ratings to cut its AMR debt ratings to "CCC," eight steps below investment grade.^[1]