- Bloomberg
Yesterday, shares of AMR were a burning wreck, like the first scene in the first episode of “Lost.” Today they’re up in the air again, like the first scene in the first episode of the last season of “Lost.”
AMR shares are up 21% today, following a 33% plunge yesterday. Delta and other airlines are bouncing back from big declines, too.
There’s no magic in this story, though (there wasn’t much magic to the last season of “Lost,” either, for that matter): Just a couple of analyst notes calling the market’s action yesterday overblown.
First came Avondale Partners, which took the bold step of upgrading AMR to “buy” from “hold:”
Press accounts suggesting an imminent Chapter 11 filing have crushed AMR shares. Although AMR Corp may lose $1.06 Billion this year, it should have no trouble meeting its obligations. While its losses may slightly exceed $1 billion, its depreciation should also exceed $1 billion. Thus, cash burn from operations should be minimal.
Separately, American has reported 3Q11 unrestricted cash of $4.2 billion. Additionally, we doubt AMR management would choose bankruptcy to force attractive labor contracts that they could not otherwise negotiate. Management has too proudly and too often touted their success in taking care of their people. At today’s prices, even with continuing losses if there is no AMR bankruptcy, simply a more normal overall stock market environment should bring a double or more to today’s investor.
Then came J.P. Morgan, which scratched its head over yesterday’s market panic, and the attendant pain it caused for other airline shares:
We are unaware of any analysis to support the apparent market view that an AMR bankruptcy is near. Furthermore, we would view a potential filing as an industry (exAMR) positive, making Monday’s sympathy sell-off all the more puzzling to us. We remain confident in AMR’s Chapter 11 avoidance prospects in the near term, though 2012/2013 liquidity could prove challenging under our conservative (we hope, as we’re modeling for recession) base case assumptions.
Why Monday? We are unaware of any analysis or reasonable catalyst for Monday’s sell-off in AMR. Granted, October pilot retirements exceeded September’s level, though we believe the exodus was driven in large part by the ability of retiring pilots to lock in pre-August equity values as part of their defined contribution plan. Most importantly, early retirements do not cause an immediate draw on company cash, and should not be considered a trigger for bankruptcy, in our view.
But what about that recession issue? Could AMR survive another one of those? J.P. Morgan thinks so. Probably, anyway:
Assuming a mild U.S. recession and $80 oil, we expect AMR to end 2012 with just under $2 billion of unrestricted cash (<10% of LTM rev), at which point things could prove challenging. However, this assumes that AMR can only refinance $565 million of 2012′s $1.9 billion in maturities (along with 80% of aircraft capex), no progress with labor, and that spot jet fuel remains at its current $2.85/gallon (with +/-$0.10 equal to +/-$300 million liquidity variance). Less conservative financing assumptions plus labor concessions and some fuel relief could easily improve year ending liquidity by over $1 billion.
