An Upgrade Isn't a Signal to Buy

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The ink from American Airlines parent AMR's (NYS: AMR) bankruptcy is barely dry and already analysts are starting to re-evaluate airline stocks. This was led by Barclay's analyst Gary Chase upgrading the stock of US Airways (NYS: LCC) amid rumors and speculation that the airlines would seek to partner up.

It takes time
A mere 72 hours after an aircraft bankruptcy might be a bit early in the process to start speculating about an end result. By my count, there have been six bankruptcies among major U.S. carriers since 2002. The average length of time spent under Chapter 11 in these instances was around 19 months:

Airline

Entered Bankruptcy

Exited Bankruptcy

Note

US AirwaysAug. 11, 2002Mar 31, 2003First bankruptcy.
United AirlinesDec. 9, 2002Feb. 1, 2006Merged with Continental in 2010.
US AirwaysSep. 12, 2004Sep. 27, 2005Acquired by America West; kept US Airways name.
Northwest AirlinesSep. 14, 2005May 31, 2007Acquired by Delta in 2008.
Delta Air LinesSep. 14, 2005April 30, 2007At filing, four of top seven carriers under bankruptcy protection.
AMRNov. 29, 2011TBDCEO stepped down.

Source: Airlines.org.

I think it would be foolish to assume that a company as large as American, whose bankruptcy is the 12th largest among non-financial companies, can resolve its situation in the near term. Delta and Northwest, the last major airlines to file for Chapter 11 protection, took about 19 months to exit bankruptcy. AMR's goal is to emerge from bankruptcy slightly faster, in less than 15 months, according to AMR CEO Tom Horton.

It's been there before
US Airways CEO Doug Parker has been itching to merge with one of the big carriers for some time, and has reportedly approached Delta and United in the past about potential mergers. A merger between American and US Airways (currently third and fifth, respectively, in passenger traffic) could create at least the second-largest airline in passenger traffic in the U.S., possibly behind only United Continental (NYS: UAL) and ahead of Delta Air Lines (NYS: DAL) . Through a merger, American would add hubs in Phoenix, Philadelphia, and Charlotte, North Carolina (the last is a business-travel market because of a large amount of banks).

Ultimately, a merger between these two airlines could be more beneficial to US Airways. American could be positioned to thrive on its own after reducing its costs in bankruptcy. Labor costs could rise in the event of a merger of the two companies, in part because employees for both airlines are represented by different unions. American has a stronger reputation, ranking higher in the J.D. Power and Associates 2011 North American Airline Satisfaction Study than last-place US Airways.

Take a breath
If recent history tells us anything, airline bankruptcies can take some time to resolve. I'd be totally surprised if AMR emerges from bankruptcy or merges with anyone before the end of next year. I agree with my colleague Brendan Byrnes that it would be a bad idea to put any money into AMR right now. It's only a matter of time before the shares become worthless, and many investors currently holding shares would be smart to walk away. However, that does not mean you should ignore this sector altogether. To keep up to date on future developments with AMR and the rest of these airlines, add them to your Watchlist:

At the time this article was published Fool contributor Robert Eberhard finds the history of the U.S. airline industry fascinating but holds no position in any company mentioned. Follow him on Twitter @GuruEbby. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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