Sunday, September 25, 2011

Is AMR headed toward bankruptcy?

Is a bankruptcy filing on the horizon for AMR Corp.?

The b-word is starting to swirl around the parent of American Airlines after the question was raised during a recent investor conference and the treasurer didn't completely dismiss the possibility.

The Fort Worth-based carrier has had only two profitable years in the past decade, its stock has slipped to a one-year low near $3 and credit-rating agency Moody's downgraded AMR's outlook to "negative" last week.
Some industry analysts think that the company is running out of cash and that a bankruptcy filing is possible. But others say the airline still has another year or two to turn its finances around.

"They have a mess on their hands when it comes to their operating costs and their financial commitments," said Bob Herbst, an industry consultant who runs AirlineFinancials.com. "They are just in bad shape right now."

Herbst said AMR needs to reorganize because its current business model is uncompetitive and unsustainable. He puts the odds that American will file for bankruptcy in the next year at higher than 50-50.

The company's assets look adequate. AMR expects to have $4.7 billion in cash and short-term investments at the end of the third quarter.

But it's also facing some large debt payments. AMR said that as of June 30, it had $1.3 billion in debt payments due by the end of 2011 and $1.8 billion due by the end of 2012. The total debt at the end of the second quarter was $11.8 billion. And when $7.9 billion in underfunded pension benefits and $2.5 billion in other long term liabilities are added, the company has over $30 billion in debt and other long-term obligations.

In downgrading its outlook, Moody's said it expects the company's cash position to drop in the medium term as debt payments and investments in new aircraft exceed operating cash flow.

But Maxim Group analyst Ray Neidl said that the cash levels are still strong and that AMR may be able to stem "the cash bleed" by cutting capacity and trimming other nonlabor and nonfuel costs.

"AMR is in no immediate danger of forced bankruptcy or under great pressure from its board of directors so management seems to be in no great rush to solve the challenging problems facing the company," Neidl wrote in a research note to investors. But Neidl was very critical of management for not being innovative in addressing the financial issues andfor hiding from investors.

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