AMR Corporation (AAMRQ)

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AMR Corporation (NYSE:AMR) is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles, and AMR Eagle Holding Corporation, which runs American Eagle Airlines and Executive Airlines. On an average day, American Airlines flies approximately 3,400 flights between 250 destinations.[1]

Business Overview

AMR operates in the airline business primarily through American Airlines but also owns American Eagle Airlines and Executive Airlines.[1] 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 but highly volatile oil prices directly impact costs. The company's average age of its aircraft is 15 years, in par with the average age of the full-service airline industry's aircraft, [2].

Important News

AMR Corp's American Airlines is negotiating with aircraft makers EADS NV (EADSY) and Boeing Company (BA) to replace its entire domestic fleet by purchasing at least 250 airplanes in a deal valued at about $15 billion. American, which currently operates an all Boeing fleet, is interested in Airbus' narrow-body family of A320 airplanes as well as a new-engine A320 variant that will go into production in 2015. [3]

Business Growth[4] [5]

  • Revenues: Revenue grew from $19.9 billion in 2009 to $22.17 billion in 2010, which represents a 11.4% growth. For the second quarter of 2011, revenue grew 7.8% to $6.1 billion compared to the year before.
  • Net Income: Net income grew from a $1.47 billion in loss to $471 million in loss, a $1 billion improvement due to the improvement in the economic background of the world. For the second quarter of 2011, net income fell from a loss of $11 million in 2010 to a loss of $286 million, which is a 2500% loss due to increasing fuel prices.

Geographic Segments[4]

  • Domestic (U.S and Canada): 60% of total revenue
  • Latin America: 21% of total revenue
  • Atlantic: 15.17% of total revenue
  • Pacific: 4% of total revenue

Trends & Forces

Airline industries are more sensitive to the economy than other industries

Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators.[6] Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.

Price competition in the airline industry is prohibitively intense

The airline industry is characterized by substantial and intense price competition. Fare discounting by competitors has historically had a negative effect on AMR’s and others' financial results because airline providers are generally required to match competitors' fares - failing to match would provide even less revenue due to customers’ price sensitivity.

In recent years, a number of low-cost carriers have entered the domestic market. Several major airlines, including AMR, have implemented efforts to lower their costs since lower cost structures enable airlines to offer lower fares. In addition, several air carriers have reorganized in recent years under Chapter 11, including United, Delta and US Airways. These cost reduction efforts and bankruptcy reorganizations have allowed carriers to decrease operating costs. In the past, lower cost structures have generally resulted in fare reductions. If fare reductions are not offset by increases in passenger traffic, changes in the mix of traffic that improve yields and/or cost reductions, AMR's operating results will be negatively impacted.[1]

AMR's bottom line is heavily impacted by fuel prices

Like other airlines, fuel costs are one of AMR's largest operating expenses, accounting for a third of the company's total operating expenses. Uncertainty in oil prices, forces AMR to enter into hedging agreements for its fuel. However, this poses a risk if oil prices drop significantly from the hedged fuel price. As a result of volatile oil prices, AMR faces uncertainty in costs.


AirTran Holdings (AAI): AirTran Holdings (Nasdaq:AAI) is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.[7]

Delta Air Lines Inc. (DAL): Delta Air Lines is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005. Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings. [8]

United Continental Holdings (UAL) United Continental Holdings (UAL) is a holding company and its principals are United Airlines and Continental Airlines. The merger between United Airlines and continental took place on October 1st, 2010. Due to the merger, United Continental Holdings is the largest airline in the world. The combined entity operates approximately 5,800 flights a day to more than 375 U.S. domestic and international destinations.The company's hub and spoke system allows it to transport passengers between a large number of destinations with substantially more frequent service than if each route were served directly.

JetBlue Airways (JBLU): JetBlue Airways is the 8th largest airline in the U.S. by revenue passenger miles. JetBlue differentiates itself from other airline travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines. JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service to over 50 destinations in around 20 states, Puerto Rico, Mexico, and the Carribean.[9]

Southwest Airlines Company (LUV): Southwest Airlines is the largest domestic carrier by total passengers, carrying over 100 million passengers. Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging. Because of its low costs, Southwest was able to remain profitable for 37 consecutive years, a feat unmatched in commercial aviation history.[10]

US Airways Group (LCC) US Airways is a major domestic air carrier approximately operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.[11]


  1. 1.0 1.1 1.2 Wikinvest SEC Files: AMR 2010 10-K, Item 1, Business
  2. Wikinvest SEC Files: AMR 2010 10-K, Item 2, Properties
  3. Reuters: AMR talking with Boeing, Airbus for 250 planes: report
  4. 4.0 4.1 Wikinvest SEC Files: AMR 2010 10-K, Item 8, Selected Financial Data
  5. American Airlines News Release Second Quarter Earnings Conference Call
  6. MarketWatch: Airline Stocks Hammered by Latest Economic Data, 08-19-2010
  7. Wikinvest Stock Summary: AirTran
  8. Wikinvest Stock Summary: DAL
  9. Wikinvest Stock Summary: JBLU
  10. Wikinvest Stock Summary: LUV
  11. Wikinvest Stock Summary: LCC
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