Puzzled By Stock Sell-Off, Analysts Quell AA Bankruptcy Rumors

Not many companies had a good Monday on Wall Street, but few had it worse than American Airlines parent AMR Corp., whose tumbling stock price hit an eight-year low and fueled bankruptcy speculation. Despite apparent investor fears, a march to Chapter 11 is unlikely in the near-term, according to airline analysts.  [more]

"We are unaware of any analysis to support the apparent market view that an AMR bankruptcy is near," according to JP Morgan aviation analyst Jamie Baker. AMR should finish 2011 with nearly $4 billion in unrestricted cash and end 2012 with about half that, according to JP Morgan projections, which factor in "a mild U.S. recession and $80 oil."

Calling Monday's sell-off "puzzling," Baker noted JP Morgan is "confident in AMR's Chapter 11 avoidance prospects in the near term." Only "an exogenous shock" could trigger a near-term plunge into bankruptcy, he added.

Dahlman Rose & Co. analyst Helane Becker similarly did not see what Monday's fuss was about. "We continue to be concerned about liquidity at AMR Corp., but that is no different from where we were a week or two ago," she noted.

As stock-price volatility paused trading of AMR shares on the New York Stock Exchange on Monday, even AMR issued a rare comment on stock performance, claiming, "There is no company-driven news that has caused the volatility in AMR shares today," according to a statement issued Monday.

Some investors cited a surge in pilot retirements as an indicator of bankruptcy risk, but JP Morgan claimed that "the exodus was driven in large part by the ability of retiring pilots to lock in pre-August equity values as part of their defined contribution plan." Furthermore, "Early retirements do not cause an immediate draw on company cash, and should not be considered a trigger for bankruptcy," Baker noted.

That doesn't mean all is well at AMR. Analysts continue to see structural issues at the company, which has a far higher cost structure than peers and has failed to generate profits in recent years. Management has cited labor costs as one key barrier to profitability, especially as many of American's competitors in the past decade have amended contracts through bankruptcy reorganization.

AMR management and pilots are in talks this week, and Baker suggested that the fall in AMR's market capitalization on Monday possibly "pushes management and pilots closer to a deal."

While that remains to be seen, Baker expected market panic to ease and AMR shares "to rally in the short term as investors begin looking past rumor and rhetoric and instead focus on the merits of AMR liquidity." Maybe that's already starting to happen: The carrier's stock price on Tuesday inched up a bit from Monday's lows.