Is This Airline Stuck on the Tarmac?
American Airlines, the third-largest U.S. airline and subsidiary of AMR (NYS: AMR) , seems to have hit some turbulence. Shares of AMR fell 7.4% in a single session last month after the airline reported a larger-than-expected quarterly loss of $162 million, causing investors, analysts, and experts to fasten their seatbelts. Should you be investing your hard-earned money in this airline stock?
Sinking share value
American Airlines has been mired in trouble for quite some time now. The quarterly loss was the company's fourth consecutive, highlighting the airline's bleak financial position. AMR's stock has nosedived for multiple reasons in the past few months. After the announcement of the quarterly results, news that the airline might seek bankruptcy protection pushed shares down even further. To make matters worse, American Airlines has yet to reach an agreement with the Allied Pilots Association. Yesterday, the company made a full contract proposal to its pilots union and urged that it be put to a vote.
It is not as if the airline has not tried to streamline its operations to cut costs. According to AMR's CEO, Gerard Arpey, the carrier is entering into partnerships and has accelerated fleet renewal plans for a turnaround. In addition, as a part of cost cutting, it plans to retire around 11 Boeing 757 aircraft starting in 2012.
However, the grave situation requires stronger steps to bring about a turnaround in the foreseeable near future.
Airline industry facing turbulence
American Airlines is not alone in its fight for survival. Among the worst-hit in the economic pandemonium, the airline industry as a whole has been in the red for seven of the past 10 years. As an industry that runs on consumer and business sentiment, airlines have suffered due to dismal job numbers, as travel is often considered a luxury and airfare is a discretionary expense. Many experts observe the airline industry keenly in order to judge market swings, as traveler demand helps indicate the level of faith people have in the economy. Major carriers like US Airways (NYS: LCC) and Delta Airlines (NYS: DAL) have just recently returned to profitability in the past few years after emerging from bankruptcy.
Margins hitting headwinds
American Airlines blamed rising fuel prices and the fluctuating value of the dollar for the huge quarterly loss. The airline faced a 40% rise in fuel costs this year compared to last year.
The future points to tumultuous times as well. The International Air Transport Association predicts airline earnings to take a cut of almost 30% next year, falling to $4.9 billion. This amount may shrink further if the economic growth is less than the predicted 2.4%. Beware of what affect this industrywide trend many have not only American Airlines, but other carriers like United Continental (NYS: UAL) and Southwest Airlines (NYS: LUV) .
Declining revenues, high costs, and travelers' tighter purse strings could make it a rough landing for American Airlines. Experts don't expect its bottom line to soar any time soon either.
As long as travellers face cash crunches -- thanks to the bleak economy and job numbers -- demand for air tickets will continue to be soft. As of now, I'm staying away from the stock.
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At the time this article was published Fool contributor Vibhuti Shah doesn't own any shares in the companies mentioned above.Motley Fool newsletter serviceshave recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.