AMR is not the only U.S. company to declare Chapter 11 recently. Eastman Kodak did as well. But Kodak’s reasons are different. It wants to buy time, financially, to auction off patents, which may or may not be valuable. Kodak may cut few if any workers in the process. AMR, on the other hand, wants to salvage its wreck while leaving behind the parts most damaged.

Several things will happened to AMR in bankruptcy court, or have happened already. A judge probably will elect to destroy one small part of the U.S. economy while he opens the door for the building another part. The destruction is assured; the risk of the rebuilding is small. The court system will pervert what the free markets would have handed AMR and a potential buyer. The buyer, in normal circumstances, would have had to accept AMR’s liabilities with its assets, as well as the future that those liabilities and assets might bring. Such a buyout of AMR would have required brilliant management willing to take a long risk for a possible substantial reward. In bankruptcy, though, a buyer will get easy access to a business from which even mediocre management can profit. Bankruptcy will make AMR a post turnaround company — one of the best targets a buyer can buy.

What a bankruptcy court will not do is force a new AMR owner to compensate the people and suppliers whose losses will make AMR viable. Delta or US Air will make money on AMR, probably instantly. The bankruptcy system does not make the acquirer pay for that profitability through some compensation of those people and companies that made the sacrifices that benefit the acquirer.

The Chapter 11 system has allowed AMR to be what it was not before — a perfectly successful company made perfect by those who will get nothing for the transformation that caused the perfection.

Douglas A. McIntyre

Boeing delivered 477 aircraft last year. The Airbus figure is expected to be 10% to 20% higher.

Airbus holds a lead that is likely to keep it in the top spot for some time. According to Reuters, “Boeing’s order total of 805 comes in second to Airbus’ order tally, which stood at 1,378 net orders at the end of November.”

It is impossible to know how many airlines turned away from Boeing as a source for mid-sized long-range airplanes when the Dreamliner was delayed several times, and for as long as five years. Certainly the history of the plane will be viewed as one of the great debacles in recent U.S. corporate history. Boeing broke enough promises about the delivery schedule that many of the world’s largest airlines are certain to be skeptical about delivery timetables for future Boeing products.

Boeing’s next challenges include more than delivery problems with the Dreamliner. The company has made a mistake in not replacing the aged 747. It has updated the old plane, but not enough to attract many new customers. Airbus’s 380 super jumbo is the large long-range plane of the future. The aircraft has had some quality problems of its own, but they likely are not substantial enough to delay the delivery dates for the aircraft.

Boeing made a series of mistakes with the 787, and it will not recover from them for years.

Douglas A. McIntyre

With American Airlines on the sidelines, we’ve looked at the stocks of several other US carriers in a search for some hidden value: Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), Southwest Airlines Co. (NYSE: LUV), US Airways Group Inc. (NYSE: LCC), JetBlue Airways Corp. (NYSE: LCC), Alaska Air Group Inc. (NYSE: ALK), Hawaiian Holdings Inc. (NASDAQ: HA), and Spirit Airlines Inc. (NASDAQ: SAVE).

Delta Air Lines has a median target price of $18.00 and is trading at $8.39 around noon today. The implied gain here is about 115%. Delta’s share price is about -1.5% lower than it was on October 21st, so the implied gain is growing because the share price is falling. The target price is unchanged since October.

US Airways has a median target price of $10.00 and is trading today at $5.36, about -7.6% lower than the share price in late October. The implied gain is about 86.6%, and the target price is unchanged since October.

United Airlines has a median target price of $32.50 and is trading today at $19.94, yielding a potential upside of nearly 63%. The stock’s target price rose by $0.50 in the past six weeks, but the share price has fallen by about -1.4% in the same period.

Every one of the nine stocks we looked at has an implied gain of greater than 20%, proving once again that numbers often don’t tell the whole story. The only stock with a chance of offering investors some value is Alaska Air. But the chance is a very slim one.

Alaska Air’s median target price was raised from $80.00 to $83.00, and the share price has increased by about 5% since late October. It’s the only one of these nine to perform that combined feat. The stock’s potential upside is 22% and its forward P/E is 7.39. The company does not pay a dividend.

Alaska has ordered 15 new 737s from Boeing Co. (NYSE: BA) and deliveries are scheduled to begin in 2012. Thirteen of the new planes will be 737-900ERs, which carry a list price of $89.6 million each. That’s a total of about $1.2 billion, which is roughly equal to both the company’s long-term debt and to its available cash.

The company does not indicate how it will finance the purchase of these planes, but a recent report in the Financial Times indicates that European banks, the main lenders to global airlines, have cut back lending for commercial aircraft purchases. That means the airlines will have to issue debt or perhaps resort to leasing new planes.

The impact on aircraft makers like Boeing is likely to be greater than the impact on airlines, but what’s reasonably certain is that the cost of capital for aircraft is going to rise. For that reason, if for no other, investing in any airline stock now is a speculative play rather than a value play.

Paul Ausick

Of course, many big public corporations also did very poorly. Several nearly destroyed their business and dragged down shareholder value with it. 24/7 Wall St. combed through the S&P 500 to find the best and worst managed companies in America for 2011.

Read: The Best Run Companies In America
Read: The Worst Run Companies In America 

To make a list of semifinalists, 24/7 Wall St. considered stock price, changes in earnings per share, major shifts in market share and changes in management, among other data. Once the initial screen was complete, we reviewed product launch success, financial results, success of new management and the performance of each company within its industry. The editors then sifted through the finalist to identify those that rewarded both customers and shareholders and those that caused these two groups the most harm.

Neither the best-run companies list nor the worst-run companies list includes a large number of corporations from any single industry. This indicates our methodology identifies well- and worst-managed companies regardless of the industry. Based on our criteria, the management of Starbucks did as good a job as the management of Oracle — two of the best-run companies. Similarly, Eastman Kodak management did as poorly as the management of American Airline parent AMR — two of the worst-run companies.

This is 24/7 Wall St.’s Best and Worst Run Companies of 2011.

The International Air Transport Association (IATA) released this new forecast this morning, and that’s not even the worst news according to the group’s CEO:

The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion—the largest since the 2008 financial crisis.

There is some slightly positive news for US carriers like Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), Southwest Airlines Co. (NYSE: LUV), and US Airways Group, Inc. (NYSE: LCC). North American carriers are expected to generate about $1.7 billion in profits during 2012 primarily due to less capacity growth which will help keep profits up.

But that isn’t enough to keep the global industry on a positive track:

Even if government intervention averts a banking crisis it is unlikely that Europe will avoid a brief recession. Business and consumer confidence has already fallen too far. Global GDP growth forecasts for 2012 have been revised downwards to 2.1%. Historically the airline industry has seen profit turn into loss whenever global GDP growth falls below 2%. This is driving the downgrade in the 2012 outlook.

The IATA expects European-based airlines to lose $600 million next year, mainly due to economic weakness in their home countries and higher passenger taxes. Asia-Pacific carriers, including China, are expected to post a profit of $2.1 billion, down from an estimated $3.3 billion profit this year.

The 2011 profit forecasts for Middle Eastern and Latin American fell by $400 million each, to $400 million and $200 million, respectively. African carriers are still expected to break even in 2011. The 2012 forecast for these three regions have all been lowered: Middle Eastern carriers are now expected to post profits of $300 million, down from $700 million; Latin American carriers are expected to post 2012 profits of $100 million, down from $400 million; and African carriers are still expected to lose $100 million.

A bit of hope does exist for fuel prices to be no higher in 2012 than they are this year, and even for prices to fall if the Eurozone debt crisis doesn’t get fixed. Of course, if that fix doesn’t happen the airlines have bigger problems than the price of fuel.

Paul Ausick

The bankruptcy of AMR will allow the carrier to negotiate with pilots as the Chapter 11 filing gives it new leverage. The courts may make it harder on all American unions to work for higher wages or to strike as a means to get them. Pilots, mechanics and flight crews could find that their wages actually fall as a judge decides that labor costs are so extreme that AMR cannot present a plan to emerge from bankruptcy. Poor labor relations often mean poor customer service, which will make it harder for American to recreate itself as a viable business.

United Continental is at the other end of the range of success and failure in the industry. According to the Wall Street Journal, “By granting a single operating certificate covering both carriers, FAA officials, in effect, blessed United Continental’s plan to meld the two airlines.” The expense of operating two carriers will disappear. The cost eliminations of the marriage will be completely realized, which should take the margins of the combined company higher.

What neither carrier can escape is high fuel prices and a recession that has kept customers off planes. Airlines have tried to offset these problems with higher fees for fliers and reduced services. As long as all carriers do the same, none has a service advantage. But United Continental has created the efficiency of one reservation system, one airport support system and one set of routes. The extra fees from customers will only enhance that advantage.

AMR, on the other hand, has to face the stigma of the bad PR that goes with a bankruptcy filing. The additional fees it charges customers may not be readily accepted as skittish travelers look for alternatives to traveling on a crippled carrier. American will go through years to build back its reputation. It may shed some operations costs in restructuring, but it cannot match those of the merger of two huge carriers.

United Continental has begun to see the best results of a single healthy carrier that has been able to cut operations costs through standard business practices. American is in the earliest stages of trying to get similar advantages through the legal system. It is easier to use good business practices as a means to success than it is by a Chapter 11 filing.

Douglas A. McIntyre

It may seem odd, but the AMR bankruptcy is likely a boom for the likes of United Continental Holdings, Inc. (NYSE: UAL) and US Airways Group, Inc. (NYSE: LCC), which are up 6% and 10% respectively.  Southwest Airlines Co. (NYSE: LUV) is up 0nly 1 penny at $7.88 and Delta Air Lines Inc. (NYSE: DAL) is up 3.6% at $7.70.  Even JetBlue Airways Corporation (NASDAQ: JBLU) is catching a 5.7% pop higher.

All those bankruptcy rumors now turned out to be true.  AMR has noted that it has $4.1 billion cash in the bank and also that it will honor all tickets and reservations for American and American Eagle Flights.

The market is telling you that shareholders will be left with nothing here.  AMR’s stock is down 85% at $0.2311 and the new 52-week trading range is $0.80 to $8.89.

Gerard Arpey has also announced his decision to retire as Chairman and Chief Executive Officer.  I wonder what his parachute has considering that this wipes out shareholders.

This move will allow other airlines to have a stronger negotiating position, it will also allow for potentially higher ticket prices, and more nickel-and-dime fees.  If this wasn’t true you wouldn’t have the peers up as much as 10%.

Early this morning in the pre-market AMR’s stock was down about 60%.  For it to slide further is a sing of doom heading the way of AMR.  A bankruptcy stock down 60% indicated at least some chance of there being assets left over.  A drop of almost 86% is a sign of a death sentence.

JON C. OGG

AMR wrote:

AMR Corporation, the parent company of American Airlines and American Eagle, and certain of our U.S.-based subsidiaries (including American and American Eagle) filed voluntary petitions for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York.  We took this action in order to achieve a cost and debt structure that is industry competitive and thereby assure our long-term viability and ability to continue delivering a world-class travel experience for customers.

The company said it plans to keep its regular schedule for flights.

Douglas A. McIntyre

The International Air Transport Association (IATA) reports that air freight volume fell by 4.7% in October, compared with the same month a year ago. Passenger traffic increased by 3.6% in the same period.

Part of the reason for the drop, according to IATA, is a drop in business confidence. Another part of the reason is that shippers switch to slower, cheaper modes of transportation when times are bad. That could partially account for recent increases in US rail traffic.

Carriers have responded by reducing the size of their fleets, but that has not stopped the decline in cargo traffic, which is down about 5% from mid-2011 levels.

Paul Ausick

Another airline that is also cheap and oversold is United Continental Holdings, Inc. (NYSE: UAL), but it is expected to only have breakeven earnings in the March quarter while Southwest is expected to be profitable in the current December and the coming March quarters. Companies like US Airways Group, Inc. (NYSE: LCC) and Delta Air Lines Inc. (NYSE: DAL) are both expected to have an operating loss in at least one of the next two quarterly reports.  The rumor mill also has many investors worried of a potential bankruptcy at AMR Corporation (NYSE: AMR).  JetBlue Airways Corporation (NASDAQ: JBLU) is attractive on valuations as well, but its problems seem to keep working against it even if its Northeast-dominance leaves it more subject to adverse weather conditions than most rivals. This leaves Southwest as the best of class among the large air carriers even if these other stocks also look oversold on their charts.
 
Southwest remains the most passenger-friendly large air carrier in the sky.  The company is also still digesting the acquisition of Airtran and it is now much more subject to the price of jet fuel that it was from 2006 to 2008.  Shares sold off from $12 to $8 during the summer sell-off and shares went well under $8 during the peak selling in late-September and early October.  After a recover, shares slid from $8.50 just about two weeks ago to end up at $7.73 most recently. 

The airline still sports a relatively young fleet and it still has perhaps the best safety record despite some less than headline-friendly in the last few years.  The company pays only a 0.2% dividend yield, but that is actually one of the few dividends in the airline sector.  With what may be more predictable earnings than peers, we view Southwest as the one airline that wants to be dividend-friendly in the years ahead.

We would consider the current $12.21 consensus analyst target from Thomson Reuters now artificially high even if the 52-week trading range is $7.15 to $13.77 versus a $7.73 price today.  In fact, that target price is high enough that we are even considering that analysts will lower their price targets ahead.  The stock is now trading under its stated book value and it trades at only about 1.1-times tangible book value.  And if it meets Thomson Reuters estimates, then the stock trades at 19-times 2011 and under 10-times 2012 expected earnings. Southwest should recover considerably unless the market tanks or unless an unforseen event occurs. 

We would note, Southwest has what is close to a net-zero exposure to Europe.  The only thing not in its favor is that hedging gasoline prices like it did in years past has been far less prevalent.  The company also has a better labor situation compared to other airlines. 

This was one of seven oversold picks poised for a comeback which was offered recently to our readers who sign up for our free daily newsletter service.  Each morning’s free newsletter is sent by email and includes the top news headlines, shows the top 15 or so analyst upgrades and downgrades, covers activist investor and insider trading, and offer key trading alerts for investors. Sign up in the box below.

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