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Busy Week At AMR

Mon Oct 01, 2007 11:55 pm

Well, this has certainly been an interesting few days in the halls of AMR's executive corridors in Fort Worth.

1. FL Group: Show us Some Cash!

On Thursday, Icelandic aviation investment/management conglomerate FL Group, which purchased a huge equity position in AMR less than a year ago when the stock was trading in the $35-40 range, sent a letter to AMR Chairman and CEO Gerard Arpey essentially asking the company to: a) open its books more to Wall Street and key investors and be more transparent with valuation of its assets, and b) seriously take a look at selling off non-core assets (FL's definition of non-core assets: AAdvantage, American Eagle, AA Maintenance and Engineering organization).

FL is no doubt frustrated and, for lack of a better word, pissed, that they have taken a huge beating on their AMR investment (now almost 9% of the company). Frankly, in my view, it's their own damn fault, though: they waited to late and didn't get the advantage of the real AMR run-up (from $1.25 in April 2003 to $41 this past spring) like so many others did.

FL contends that there is billions of dollars of untapped cash lying around in AMR's corporate structure and certain key assets like AAdvantage and AMR's in-house financial services arm, American Beach Advisors, that could potential deliver somewhere in the $4-6 billion range of new value to AMR shareholders (including FL, of course!). AMR's management, not surprisingly, disagrees, and reportedly feels that the long-term value of these assets - at least when evaluated through the lens of today's environment - are best preserved and grown by being married to the larger AMR whole.

AMR has been mum and non-committal - at least publicly - on the letter from FL, although according to reports, Wall Street is betting that AMR's traditionally conservative line when it comes to asset sales and financing means they probably won't go for this sell-off idea. Alas, a lot of power now rests in the hands of some of AMR's other huge institutional investors - like Fidelity, etc. - who cumulatively hold most of AMR stock. If Arpey and Co. can persuade them that AMR's present course is the right one, and they can be pried away from going along with the FL plan, AMR may stay intact as-is.

2. Barron's: AMR could jump 50% in Next Year

Coming fresh on the heals of analyst down-grades and downbeat reports and research notes about AMR, Barron's - out of nowhere - released a note on Sunday in their 'Weekly Roundup' saying that AMR's fundamentals are strong, it has an "enviable" route network and - surprise, surprise - has lots of intrinsic value tied up in key assets like AAdvantage, American Eagle, etc. (Where have we heard that before?)

Barron's also gave AMR its due for aggressively shoring up its balance sheet in the last 12-18 months, despite facing stiff competition who were able to do so through bankruptcy. (See #4)

3. Citi downgrades AMR, Southwest

Citing rising fuel prices, and even more alarmingly rising labor costs, Citi downgraded both AMR and LUV (Southwest) and lowered its price target guidance on both stocks. More bad news.

4. AMR Does More Work on Balance Sheet

And now just today, AMR announced that it was planning to prepay another $545M in debt in 4Q07, following on another - smaller - debt prepayment several months ago. AMR estimates that this more sizable, substantial prepayment alone will save approximately $27M in interest expense per annum at run-rate, which should give AMR a bit more financial flexibility. The prepayment will also release from obligation a total of 16 aircraft tied to the debt. Separately, AMR announced that wholly-owned subsidiary AMR Eagle (parent of American Eagle) also made a debt prepayment of $32M this year on several asset-backed securities tied to some of their Bombardier RJs, brining total prepayment on said securities to $159M this year, all in additional to regularly-scheduled principal payments.

AMR continues to do an amazing job of judiciously allocating cash to shore up their balance sheet while still generating - and retaining - sizable amounts of cash each quarter. In 2Q07, AMR generated $1.5B in positive cashflow, and expects to end 3Q07 increasing their balance of cash and short-term liquid equivalents to $5.7B, the most in the industry, and $200M more than the same period last year. The sheer scope of AMR's debt reduction efforts in just the past year are remarkable: since 2005, the company estimates it will have reduced total debt by $4.5B, and reduced net debt by over $5B, to just over $11B. While still high, that is a lot better than the $16+B that it stood at in two years ago.

The primarily implications of todays announcement, in my mind, are two fold: first, this is another prime example of AMR conservatively trudging along, paying down debt slowly but surely, and strengthening their balance weight to get back down to fighting weight and lighten their debt load. Second, the word on debt prepayment - and freeing up aircraft that the debt was tied to - may well be a sign to FL Group that AMR, not FL, is still running the show, and that they are primarily focused on cash creation and debt reduction right now, rather than selling off profitable assets to appease investors who bet big and bet wrong. It may also be a sign that, by freeing up aircraft that were previously encumbered and mortgaged as part of debt financing, they may be preparing to offload some of these aircraft as the bring new 737s into the fleet over the next several years, or perhaps find additional new fleet alternatives.
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RE: Busy Week At AMR

Tue Oct 02, 2007 2:34 am

Interesting. AMR is taking great strides to reduce their debt.

I agree with what I believe you're hinting at. AMR will likely be placing large aircraft orders in the near future. The company will enjoy better financing terms if they can get their debt down first.

Selling assets would generate immediate cash for debt or aircraft orders. But management may be right in holding these assets with AMR instead.
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RE: Busy Week At AMR

Tue Oct 02, 2007 3:22 am

Quoting Commavia (Thread starter):
may well be a sign to FL Group that AMR, not FL, is still running the show

That is what is at issue. FL and the markets are all about what have you done for me lately. No investor likes to hear a company is "sitting" on cash reserves - regardless of the reason (which very well might be for all of the right reasons.) Either spend it or give it back to the owners.

To this add the absolutely horrible labor relations, and AMR, in FL and the market's view, is not a good investment at the moment. AMR needs to solve the labor issues NOW; then begin the fleet renewal. Since niether side wants to budge on the labor issues, this could be a very hard quarter for AMR.
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RE: Busy Week At AMR

Tue Oct 02, 2007 6:22 am

AMR is probably undervalued. Their market cap approximately equals their cash on hand. Not realistic.

Nevertheless, Wall Street sees alot of questions in AMR's future and it will probably take a dramatic move by AMR in order to change their mind. I don't think selling Advantage is the answer; short term cash for much lower value later on is not a long-term strategy for success.
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Joined: Tue Aug 10, 2004 7:17 am

RE: Busy Week At AMR

Tue Oct 02, 2007 6:30 am

AMR has the following major headwinds right now:
1. Fuel prices - at $81/brl and rising - they aren't that well hedged
2. Economic calamity - load factors are becoming weaker during shoulder season and the economy looks to be stumbling a bit, which will curtail any increase in air travel demand, especially if business begin to tighten their wallets
3. Labor contracts - this is the big one - AA better be prepared to pony up a good chunk of cash or there may be a major, devastating strike next year.

I am not looking to increase my position at the present point due to the points I made above.

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