American Airlines Bankruptcy Fears Rock Wall Street

NEW YORK -- The stock of American Airlines' parent company plunged to lows not seen since 2003 on new fears that the carrier was headed for bankruptcy protection.

The stock dropped on a combination of news and speculation by Wall Street analysts that the only way American can return to profitability is to use the bankruptcy court to cut its costs. The news included a gloomy outlook for the global airline industry and an announcement last Friday that 129 American pilots retired.

Shares of AMR, the parent company, closed at $1.98, down more than 33%.

Stocks for the entire U.S. airline industry have fallen 40 percent for the year.

Morningstar airline analyst Basili Alukos was among those advocating that American seek bankruptcy protection.

"For a long time, I've thought that the company has been at a disadvantage," Alukos said in an interview.

Alukos said without going through bankruptcy, he doubted that American can bring its labor or debt in line with the lower costs competitors have. American is the only major airline that has lost money this year, losing $286 million in the second quarter alone.

"It's been a tremendous overreaction today in my opinion," said Ray Neidl an airline specialist with the Maxim Group. "American does have big problems to solve, but they have plenty of time to do it."

The airline in a statement said bankruptcy "is certainly not our goal or our preference. We know we need to improve our results, and we have a sense of urgency as we work to achieve that."

The airline is expected to end the third quarter with a healthy $4.3 billion in cash reserves, but in a note to investors Monday morning, Alukos said the airlines still "may not be able to satisfy all of its future commitments on its current fiscal trajectory. We are placing AMR under review as we reassess the company's ability to remain solvent."

As of June 30, AMR had about $9.77 billion in liabilities.

Other factors leading to Monday's stock plunge were:

• A major airline trade group said that the industry may be headed for a downturn.
• A Wall Street Journal column said the airline should "use a pre-packaged bankruptcy to rinse out legacy costs of obligations."
• Some on Wall Street viewed high numbers of American pilot retirements as a sign that senior employees are fearful for the company's health. At the start of the weekend 129 pilots put in their retirement papers. The prior month saw 111 pilots retire. During a typical month, 10 pilots retire.

David J. Bates, president of the pilots union for American dismissed that notion, saying the retirements have nothing to do with the health of the airline.

"A lot of it is pure economics," Bates said.

A provision in the pilots' retirement benefits allows them to lock in the value of some of their investments going back 60 to 90 days, so pilots who retire now can avoid this summer's stock market slump.

Bates reiterated his confidence in the company's finances saying, "I don't see any immediate liquidity concerns."

Not everybody sees the airline heading to bankruptcy court.

"Management has indicated time and time again that they have no interest in filing," said Helane Becker, an analyst with Dahlman Rose.

While most major U.S. airlines filed for bankruptcy protection early last decade, American chose to avoid restructuring. It also avoided a reorganization when fuel prices spiked and travel declined in 2008 and 2009. 

American Airlines is one of Tulsa's largest employers with more than 5,600 people on the payroll.