AMR Still Flying, With Caution (AMR)

AMR Corporation (NYSE: AMR), American Airlines' parent, reported a Q2 net loss of $1.4 Billion or -$5.77 EPS.  Results include special charges of $1.1 billion non-cash accounting charges to write down the value of certain aircraft and related long-lived assets and about $55 million of a total $70 million expected for severance-related costs.  Excluding these special charges, AMR claims a net loss of $284 million, or -$1.13 EPS.  This compares to a net profit of $317 million for Q2 of 2007.  Jet fuel prices contributed significantly to the  loss as AMR paid $3.19 per gallon for jet fuel in Q2 compared to $2.09 a gallon in the second quarter of 2007.  It paid $838 million more for fuel in  Q2-2008 over prevailing prices from the prior-year period.

If you think the company is calling itself or the sector a sure bet on the future, you might want to read the consolidated quotes.  Chairman and CEO Gerard Arpey said, "Our company continues to be severely challenged by the fuel crisis that has afflicted our entire industry, and we expect these difficulties to continue for the foreseeable future.... results were disappointing, but I am also pleased with our efforts as a company to take difficult yet necessary steps to manage through this uncertainty. While we believe the airline industry cannot continue, in its current form, at today's record fuel prices, we also believe our decisions and hard work by employees in recent years have better prepared us to face these challenges. We remain committed to taking action -- whether that relates to capacity reductions, revenue enhancements, fleet changes or other efforts to improve our financial foundation -- as we work to secure our long-term future."

AMR said it has obtained $720 million in new financing through a number of transactions.  It sold certain aircraft that will remain in the AMR fleet through a lease-back agreement, and issued mortgage debt secured by aircraft.  $500 million of the new financing was received in July and will be recorded in the cash balance next quarter.  AMR ended the quarter with $5.5 billion in cash and short-term investments, but that includes a restricted balance of $434 million.  AMR still expects the previously announced sale of American Beacon Advisors, Inc. with a $480 million value in total consideration to be completed in Q3-2008.

AMR has also decided to retire all 34 of its A300 aircraft by the end of 2009 rather than out to 2012, and it will retire 30 MD-80s, 10 A300s, 26 Saab turbo-prop aircraft, and will retire /remove 37 regional jets from service.  AMR continues to expect to take delivery of 70 more-fuel-efficient Boeing 737-800 aircraft in 2009 and 2010.

Due to the current airline industry environment, AMR has decided to hold off on its planned divestiture of regional carrier American Eagle until conditions are more stable. The company does note that a divestiture makes sense in the long term for AMR, American, American Eagle, and shareholders but also believes that a divestiture is not sensible amid current conditions.

For 2008 it still expects a 7% to 8% capacity decline (given in May) but it still sees further capacity reductions in 2009.  AMR is planning for an average of $3.81/gallon in Q3-2008 and $3.42/gallon for 2008 as an average.  It claims about 35% of its Q3-2008 fuel consumption capped at an average equivalent of $95 per barrel (jet fuel equivalent of $2.92/gallon), with 34% of its anticipated full-year consumption capped at an average crude equivalent of $82 per barrel (jet fuel equivalent of $2.60/gallon). Consolidated consumption
for the third quarter is expected to be 772 million gallons of jet fuel.  It sees mainline unit costs up 21.5% and sees consolidated unit costs up 21.2% in 2008 over 2007.

AMR shares are up about 2% at $4.50 right before the open.  Its 52-week trading range is $4.00 to $29.32.

Jon C. Ogg
July 16, 2008