American Airlines (AMR) Is A Penny Stock!

| December 1, 2011 | 0 Comments

American AirlinesI’m sure you’ve heard it by now – AMR (AMR), the parent company for American Airlines, has just filed for Chapter 11 bankruptcy.

As of this writing, shares in AMR are trading for a minuscule $0.33.  You know what that means… American Airlines is a penny stock!

I know, I know… ho hum.  Another airline files for bankruptcy.  In this day and age, we’ve come to expect every airline not named Southwest (LUV) to file for bankruptcy protection at least once every decade.

However, surprise or not, it’s still a big deal. 

After all, this is American Airlines we’re talking about.  This isn’t some regional, podunk airline.  They used to be the largest US carrier… and they still have 3,000 daily US departures. 

As a matter of fact, in 2007 the stock was trading for over $40 a share!

However, AMR just couldn’t hack it.  The entire industry is dealing with lower demand for air travel.  At the same time, jet fuel costs are soaring.  Now that’s a tough combination for any airline to overcome.

Meanwhile, AMR’s main competitors like United Continental (UAL) and Delta (DAL) had already used Chapter 11 protection earlier in the decade to cut costs… and initiate important mergers.  In other words, American was already working at a disadvantage.

Here’s the thing…

AMR had another huge issue to contend with.  And it ultimately led to their undoing.

You see, the company has been stuck in union negotiations for years.  And while they were unable to come to terms with the union, their labor costs kept on rising compared to their competitors.

Ultimately, it was the high labor costs that forced the company’s hand.  Of course, Chapter 11 is one way to resolve stalled contract negotiations.

Too bad it also wipes out the shareholders…

To be frank, bankruptcy was the best solution for AMR at this stage.  The company can now focus on restructuring while they actually have enough cash to survive the process.

They’ll likely emerge from bankruptcy as a stronger company.

But as I mentioned earlier, it doesn’t help shareholders one bit. 

The share price has plummeted to almost nothing.  And the price will almost certainly go to zero.  Usually after a Chapter 11, new shares are issued… and the old shares become worthless.

The upshot… American Airlines could be worth a look when they emerge from bankruptcy down the road.  But for now, don’t bother.  This version of AMR is finished.

Yours in profit,

Gordon Lewis

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