Airline Shares Crushed: What You Need to Know
Oct 3rd 2011 3:50PM
Updated Oct 3rd 2011 3:58PM
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of airlines were in a nosedive today with American Airlines parent AMR (NYS: AMR) falling as much as 41%, while Delta Air Lines (NYS: DAL) , United Continental (NYS: UAL) , US Airways (NYS: LCC) , and JetBlue (NAS: JBLU) all fell 10% or more. Even perennial investor favorite Southwest Airlines (NYS: LUV) shed as much as 7%.
So what: What exactly is clobbering AMR and the airline sector as a whole? It's actually really nothing new for AMR or the industry: Bankruptcy fears. Though AMR previously managed to avoid bankruptcy when some of its major competitors fell into that cold embrace, the company is currently unprofitable, has an impressive amount of negative free cash flow over the past few years, and boasts a debt load of nearly $12 billion (and that doesn't include pension benefits). Is there any wonder that investors might fear bankruptcy?
But the big drop came today due to reports that there was a jump in AMR pilots retiring. The concern is that these pilots are trying to protect their pension benefits, which could be at risk if the company files for bankruptcy protection.
As for the rest of the airline stocks, there may be some amount of decline that's being driven by the AMR bankruptcy fears, but they are no doubt also being hit by the downgrade of United and US Airways by a Citigroup (NYS: C) analyst who's concerned about how a weakening economy will impact the airlines' bottom lines.
Now what: In a statement today, AMR management said that bankruptcy is "not our goal or preference." It's possible that that is one of the weakest bankruptcy-fear rebuttals that I've ever seen, so I can't blame investors that weren't comforted by that statement.
Of course, the real bottom line is that whether we're talking about AMR, United, US Airways, or really any of the other airlines, the economics of the business are simply terrible. With the possible exception of Southwest, the airlines have invested a tremendous amount of money in their respective businesses but have never proven over any extended period of time that they can earn a reasonable return for their investors. With a lot of truly great businesses out there that you can invest in, why bother with this lackluster group?
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