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AMR AT A GLANCE

P/E ► -1.43   EV/EBITDA ► 27.8 AVG ROA ► -2.7% AVG ROE ► -204.3% LOW Debt to Equity ► -10.0   Current Ratio ► 0.817 AVG Interest Coverage Ratio ► -1.01 LOW

 

 

 

 

 

 

AMR Corporation (NYSE:AMR) is a the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles,^[1] and AMR Eagle Holding Corporation, which runs American Eagle Airlines and Executive Airlines.^[2] On an average day, American Airlines flies about 270,000 passengers on approximately 3,300 flights^[3] between its 170 destination airports^[2] and booked more scheduled enplanements than any airline but Southwest Airlines during the first ten months of 2008.^[4]

American Airlines' 2008 fiscal year reflected the trend in the airline industry in general: increased fuel prices and decreased Available Seat Miles (ASM) eroded operating income and resulted in a $2.1 billion net loss. During the most recent fiscal year, fuel prices per gallon rose from $2.13 to $3.03, a 42% increase, while load factor decreased by 90 basis points to 80.6% and ASM decreased by 3.8%.^[5]

Like most airlines, American faced serious financial trouble after air travel plummeted following the September 11th attacks. Unlike all of the other legacy airlines but Continental, the company did not file for bankruptcy in the aftermath of the attacks and has consequently not been able to restructure itself under protection from creditors; as a result, the company has been at a competitive disadvantage because of its especially high labor and pension costs.^[6]

Even so, the company has struggled to negotiate with its labor unions; in 2008, the company's pilots demanded a 50% increase in payment that highlighted the management-labor tension that is present at the company.^[7] By January 2009, all of American's unions had sought federal mediation for negotiations with the company.^[8]

Business Overview

AMR operates in the airline business primarily through American Airlines but also owns American Eagle Airlines and Executive Airlines.^[2] The company generates its revenue by booking passengers on its flights throughout the world and only turns a profit by keeping its cost per available seat mile (CASM) below its revenue per available seat mile (RASM). The highly competitive nature of the airline industry forces AMR to keep its prices low and but highly volatile oil prices directly impact costs. As a result, the company lost over $2 billion in 2008.^[9]

Business & Financial Metrics

2008 proved to be the second-worst year in AMR's history, and its $2.1 billion loss was only trumped by its $3.5 billion loss in 2002 when the company struggled in the wake of the September 11 terrorist attacks.^[12]

AMR attained profitability in 2006^[10] but could not sustain it in 2008 when rising fuel prices cost the company billions.^[12]

Early in the year, the company suffered from high fuel prices like many of its competitors, as average fuel price per gallon increased from $2.13 in 2007 to $3.03 in 2008 ^[13]. As a result, the company spent $9.01 billion on fuel throughout the year, 35% more than in 2007.^[12] A 16.8% growth in maintenance and repairs expenses, due to an aging aircraft fleet, also caused operating expenses to increase during 2008 ^[14]; however, in 1Q09, maintenance and repairs expenses fell by 3.2% as compared to 1Q08. ^[15] Overall, operating expenses grew by 16.8%, to $25.7 billion in 2008, primarily due to the rise in oil prices. Yet, with crude oil prices plummeting in 4Q08 and 1Q09--American Airlines paid $1.91 per gallon in the most recent quarter--the company was able to decrease operating expenses in 1Q09 by 14.5% relative to 1Q08.^[15]

Although American Airlines was able to increase its operating revenue by 3.6%, to $23.8 billion, in 2008, this gain was insufficient to compensate for the even greater increase in operating expenses over the same period. ^[16] This is despite a significant ASM, or capacity, decrease of 3.8% in 2008^[16], which can be attributed, in part, to American Airlines attempt to find other sources of revenue, such as a $15 fee for the first checked bag. ^[17] By 1Q09, the lack of demand for air travel, which further decreased capacity by 8% relative to 1Q08, caused revenue to fall by 15.1%, as compared to the same period in 2008. ^[18]

AMR also incurred a net loss of $340 million in 2008 Q4, a steep drop from the $69 million it lost in 2007 Q4, because of losses from fuel hedges to bet that oil prices would rise.^[19] The losses continued in 2009, as the company reported a net loss of $375 million in 1Q09, as compared to a loss of $341 million in 1Q08. ^[20]

American Airlines net income was once negatively impacted by fuel hedges in 2Q09, as it had a $197 million increase in fuel expenses.^[21] Although operating expenses fell overall for the quarter, this is largely due to scaled back operations, which resulted in a 7.6% decrease in ASMs.^[21] Likewise, revenues declined by 20.9% to $4.9 billion, which, in addition to the decline in capacity, was compounded by a 16% drop in revenue per available seat mile (RASM) to 9.53 cents.^[21] Overall, AMR posted a $390 million net loss for 2Q09.^[21]

Although a 46.6% decline in airline fuel expense, to $1.453 billion, led to a 19.8% fall in operating expenses overall, AMR nonetheless reported a $194 million operating loss and a $359 million net loss in 3Q09.^[22] This is as a result of an over 20% fall in operating revenue for the quarter, as the company once again faced declining demand from the ongoing global recession and fears of H1N1 Influenza.^[22] Further, a current ratio of .817 and Long-Term Debt to Equity ratio of 1.41 demonstrates the potential liquidity and solvency difficulties facing AMR.^[22]

Business Segments

AMR aims to increase revenue with growth in international travel.^[23]

AMR has only one reportable operating segment that involves the operation of its principal subsidiary, American Airlines, and its regional airline subsidiary, AMR Eagle Holding Corporation.^[2] AMR Eagle owns two subsidiaries of its own: American Eagle Airlines and Executive Airlines.^[2]

• American Airlines (92.7% of total revenue):^[9] Based on available seat miles and revenue passenger miles, American Airlines was the world's largest airline^[2] until Delta Air Lines merged with Northwest Airlines in April 2008.^[1] This subsidiary provides scheduled jet service to approximately 170 airports in North America, the Caribbean, Latin America, Europe and Asia.^[2] It is also one of the biggest scheduled air freight carriers in the world and ships freight on its regular passenger flights.^[2]
• AMR Eagle (7.3% of total revenue):^[9] This subsidiary acts as the holding company for American Eagle Airlines and Executive Airlines; these airlines provide connecting service from eight of American Airlines's high-traffic hub cities to smaller airports throughout the United States, Canada, Mexico and the Caribbean.^[2] In December 2007, AMR announced that Eagle will be sold or spun off. A decision has not been made on the form of the divestiture as company leadership continues to evaluate the options available.^[24]

AMR also owns^[2] American Beacon Advisors, an investment firm,^[25] and Americas Ground Services, which specializes in ground delivery of freight from airports.^[26] These subsidiaries, however, do not materially affect AMR's financial results.^[2]

Trends & Forces

Heavy debt load to mature from 2009 to 2011

AMR has $5.3 billion of debt set to mature between 2009 and 2011 including $1.8 billion during 2009.^[27] The company needs a positive cash flow and significant access to credit in order to pay off its debt on time.^[27]

American Airlines is ranked last for on-time arrivals

Between November 2007 and November 2008, American Airlines's on-time arrival rate was 68.9%, putting the airline dead-last in industry rankings.^[19] One out of eight American flights was delayed by at least 45 minutes and 2.6% of its flights were canceled: the most in the industry.^[28] Consumers can lose confidence in an airline when it is known to have high rates of delays and cancellations for its flights.

AMR's bottom line is heavily impacted by fuel prices

Fuel expenses represent one of the most variable and significant costs faced by airliners. From 2004 to 2008, fuel costs climbed from 21% to 35% of American's total operating expenses.^[29] AMR has used hedging strategies that reduced the its total fuel costs by $64 million, $97 million, $239 million, and $380 million in 2005, 2006, 2007, and 2008, respectively.^[30] However, oil prices have declined sharply since their peak of $145.29 in July 2008, reaching under $45 in January 2009.^[31] Since AMR entered into hedging agreements that would make the company break even at prices near $130 per barrel, these significantly lower fuel prices contributed significantly to the company's multibillion dollar loss in 2008.^[32]

As the airline industry becomes increasingly price-focused, AMR cannot easily pass on fuel price increases to customers.^[33] Instead, American began cutting down its flight schedule in May 2008.^[34]

Labor costs are significantly above competitors'

In 2008, American Airlines had the lowest total Available Seat Miles (ASM) Produced per Dollar of Employee Compensation, 26.63, which was 18.4% lower than the industry average of 32.65. ^[35] Since AMR was one of only two companies to avoid bankruptcy after the September 11 terrorist attacks, the company was not able to make the structural changes allowing employee pay cuts that others airlines made under bankruptcy protection^[36] and has been pressured to keep its pension fund by unions,^[37] costing the company $2 billion from the beginning of 2002 through 2008.^[38] These high costs put AMR at a disadvantage to the discount carriers that compete with the company on 80% of its domestic routes.^[39] Throughout 2008, AMR's labor costs proved to be much higher than competitors'.^[9]

Competition

AMR competes with other legacy airlines, like Delta, as well as with newer discount airliners like Southwest. The company did not file for bankruptcy after the September 11, 2001 terrorist attacks and consequently did not restructure its business model to cut costs as did its legacy airline competitors. AMR's discount airline competitors have been able to keep costs low because of their emergence after airline deregulation.

Market Share

Based on available seat miles and revenue passenger miles, American is the second largest airline in the world behind Delta Air Lines,^[1] but was actually second to Southwest Airlines in carrying the most passengers throughout the first ten months of 2008.^[4]

Statistics for the month of October 2008 place AMR in a similar position relative to its peers.

References

1. ↑ ^{1.0 1.1 1.2} Delta + Northwest = world's largest airline (April 15, 2008).
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10} AMR 2007 10-K  
3. ↑ AMR Corporation - American's Parent Company.
4. ↑ ^{4.0 4.1 4.2 4.3} October 2008 Airline Traffic Data: System Traffic Down 7.1 Percent in October from 2007 and Down 2.6 Percent for January-to-October (January 15, 2009).
5. ↑ AMR 2008 10-K, Item 1
6. ↑ AMR Corporation 2007 10K, Item 1A, pg. 14
7. ↑ "Mitchell Schnurman: Time for union, management at American to face reality," Star Telegram April 9, 2008
8. ↑ Terry Maxon (January 27, 2009). All of American Airlines' unions now seek federal mediation.
9. ↑ ^{9.00 9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 9.09 9.10 9.11 9.12 9.13 9.14 9.15 9.16 9.17 9.18 9.19 9.20 9.21 9.22 9.23 9.24} AMR January 2009 8-K  
10. ↑ ^{10.0 10.1 10.2} AMR 2006 10-K pg. 27  
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} AMR 2006 10-K pg. 40  
12. ↑ ^{12.0 12.1 12.2} Terry Maxon (January 22, 2009). American Airlines parent loses more than $2 billion in 2008.
13. ↑ 2008 AMR 10-K, Item 7
14. ↑ AMR 2008 10-K, Item 7
15. ↑ ^{15.0 15.1} AMR 1Q09 10-Q, Operating Expenses
16. ↑ ^{16.0 16.1} AMR 2008 10-K, Revenue
17. ↑ American Airlines. Baggage Allowance.
18. ↑ AMR 1Q09 10-Q, Results of Operations
19. ↑ ^{19.0 19.1} Matt Phillips (January 23, 2009). American Exec: On-Time Performance ‘Sub Par’ in 2008.
20. ↑ AMR 2009 10-Q, Item 1, pg. 3
21. ↑ ^{21.0 21.1 21.2 21.3} AMR 2Q2009 10-Q
22. ↑ ^{22.0 22.1 22.2} AMR 2009 3Q 10-Q
23. ↑ AMR 2008 10-K, Segment Reporting
24. ↑ AMR Corporation 2007 10K, Item 1, pg. 4-5
25. ↑ American Beacon Advisors: Who We Are.
26. ↑ Katie Fairbank (September 30, 1998). AMR's Global Services unit up for sale.
27. ↑ ^{27.0 27.1} Karen Brettell (March 13, 2009). Fitch cuts AMR to deeply distressed rating. Reuters.
28. ↑ Scott McCartney (January 6, 2009). Fliers Saw Longer Delays in 2008.
29. ↑ AMR 2008 10-K, Item 6
30. ↑ AMR 2008 10-K, Item 1
31. ↑ Oil prices drop after brief rally.
32. ↑ "Delta, UAL, AMR Rise on Profit Outlook, Drop in Fuel" Bloomberg.com 10/31/2008
33. ↑ American 2007 10K, Item 1a, pg. 15
34. ↑ American Airlines pulling out of Oakland (May 5, 2008).
35. ↑ MIT Airline Data Project. Total ASMs Produced per Dollar of Employee Compensation
36. ↑ Ted Reed (March 31, 2008). AMR Fights to Quell Bankruptcy Fears 2.
37. ↑ AMR 2007 Annual Report, Item 1, pg. 5
38. ↑ American Airlines Negotiations: Pensions/401(k).
39. ↑ AMR 2007 Annual Report, Item 1A, pg. 15
40. ↑ ^{40.0 40.1} DAL 8-K pg. 12  
41. ↑ ^{41.0 41.1 41.2} DAL 8-K pg. 14  
42. ↑ DAL 8-K pg. 17  
43. ↑ DAL 8-K pg. 19  
44. ↑ ^{44.0 44.1 44.2 44.3 44.4 44.5 44.6} CAL January 2009 8-K  
45. ↑ ^{45.0 45.1 45.2 45.3 45.4 45.5 45.6} JBLU January 2009 8-K  
46. ↑ ^{46.0 46.1 46.2 46.3 46.4 46.5 46.6} LUV January 2009 8-K  
47. ↑ ^{47.0 47.1 47.2 47.3 47.4 47.5 47.6} UAUA January 2009 8-K