AMR Profit in Bankruptcy and U.S. Airways Merger: Higher Plane Ticket Prices for You

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AMR Corporation (AAMRQ) has managed to do something which will sound almost impossible, or at least illogical. The parent company of American Airlines is still in bankruptcy and is still in the midst of a U.S. Airways Group Inc. (NYSE: LCC) merger, and somehow the airline managed to post and operating profit from operations in its corporate earnings report. And to add to the mix, this was also shown to a record first quarter in revenues with sales registering $6.1 billion. The end result is roughly a 1% revenue increase, but it was generated on 1.3% less capacity. Translation: higher fees and higher airplane ticket prices for you and me.

AMR lost money if you count all of the items and we expect those items to continue while it proceeds through reorganization and through a merger. The $8 million profit reported in the quarter does not include reorganization and special items. Still, this is the company’s first time to report a profit during the first quarter of any year going back to 2007. The GAAP operating profit was $52 million in the quarter.

AMR is proving that bankruptcy really did help to drive down the costs. AMR has lowered its wages and has reorganized most of its debt. Its consolidated unit costs outside of fuel and special items improved by 3.2% from this quarter a year earlier. Despite being in bankruptcy, American managed to still take delivery of 12 new aircraft in the first quarter and it is projecting to take delivery of 53 planes this year.

Investors have also received an update as the company said that it filed its Plan of Reorganization and Disclosure Statement on April 15 and its hearing is currently slated for June 4. The bankrupt airline also filed on the same day with the Securities and Exchange Commission to proceed with the planned merger with U.S. Airways.

The cash balances are almost unbelievable when you consider that AMR is in bankruptcy. The prodigal son must truly be protected. AMR ended the first quarter with roughly $5.1 billion in cash and short-term investments, with restricted cash balance included in there of $853 million. That compares to a year ago when AMR showed $5.6 billion in cash and equivalents which included restricted cash of $771 million.

On the merger, AMR contends that the combined equity value as of now would be about $11 billion. Be advised that the calculation was based upon the share price of U.S. Airways on February 13, 2013 at $14.66, while today’s share price even after a 2% drop is $16.21.

You truly saw an unusual bankruptcy procedure here. AMR’s Reorganization offers the potential for a full recovery for creditors and the common stockholders are set to receive at least 3.5% of the aggregate diluted common stock of the combined airline. Usually the creditors take a large haircut and the common stockholders get hosed much worse or wiped out entirely.

AMR shares are still OTC and are down 1.7% at $3.90 against a 52-week range of $0.36 to $4.52. U.S. Airways shares are down 2% at $16.21. We are not offering combined projections for sales and earnings of the post-merger AMR/USAir but chances are high that they will be profitable, with lower operating costs, lower capacity, and of course higher ticket prices for you and me.

The AMR (AAMRQ) chart below from stockcharts.com is rather impressive when you consider that this company is in bankruptcy.

AMR Chart

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