AMR Bull's Pen
by Chris Rugaber ([email protected])

Tired of looking at nothing but high-flying growth stocks with big fat price-to-earnings (P/E) multiples? American Airlines' holding company, AMR Corp., provides a down-to-earth alternative. (And even if you're not tired of the aforementioned stocks, AMR is still worth a look). Its growth may be slim for the next year or so, but so is its P/E, which is slightly below 9. In addition, it is poised to gain market share, has a fast-growing travel-reservations subsidiary, and is ahead of its competitors in key measures of airline business efficiency.

AMR not only owns American Airlines, the #2 U.S. passenger airline, but also American Eagle, the world's largest regional airline, and 80% of The SABRE Group, the #1 travel reservations group in the world. It has a solid balance sheet and recently began its third $500 million stock repurchase program.

AMR's recent acquisition of Reno Air, a southwestern regional airline, may be just what American Airlines needs to challenge United Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> for the #1 US carrier position. It can now compete for West Coast air traffic, and, presumably it will also steer more of Reno's former customers to its long-haul flights.

In the airline industry, the key metrics are load factors and passenger yields. Load factors are simply an expression of the percentage of seats that are occupied by passengers. Passenger yields indicate the amount an airline collects to fly one passenger one mile. By these measures, American Airlines is in great shape. Its 1997 load factor was a record 69.5%, and so far this year the company is on track to beat that record. American Eagle also posted record load factors this year for the months of September and October.

Even more revealing is the question of passenger yields. American has been able to squeeze more out of its customers than either United Airlines or Delta, its closest competitors. In the third quarter of this year, American increased its overall passenger yield to 13.3 cents, versus United's 12.1 and Delta's 12.4. Considering that the airline industry overall is likely to grow in single digits in the next few years, American's ability to command a premium from its passengers is crucial.

But that's not all American has going for it. It has a multi-year deal with Boeing that gives it both flexibility in purchasing and stability in pricing. As a result, the company will retire more jets than it had planned next year, and while that may lead to slower growth in 1999, it will save millions in subsequent years. In addition, the move makes sense at this point, given that 1999 is unlikely to see any major increases in airline traffic. Better to do it now than when the excess capacity might be needed.

American is also continuing to build relationships with international carriers, which ought to increase its business from frequent international travelers. It recently announced its "oneworld" initiative, which links it with four other leading airlines to provide greater service and value. Details are sketchy, but the airlines include British Airways, Canadian Airlines, Cathay Pacific Airways, and Qantas Airways. Potential benefits include transferring frequent flyer miles, reciprocity for airport lounges and clubs, and "round-the-world products." Ideally, the oneworld initiative could lead to special deals for anyone flying American from anywhere in the domestic US to a major international airport, like New York's JFK or Los Angeles' LAX, if they then take a flight from one of the other cooperating airlines.

Meanwhile, The SABRE Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSG)") else Response.Write("(NYSE: TSG)") end if %> provides AMR with some impressive diversification. Over 30,000 travel agencies in more than 70 countries subscribe to SABRE and its six terabytes of data. SABRE processes more than 350,000 calls a day and performs 5,200 transactions per second. It's no wonder that TSG's information technology division now has a 25-year, multi-billion dollar agreement with US Airways to provide almost all of its IT solutions, or that SABRE's IT subdivision showed a 77.9% jump in revenues in the third quarter of this year, versus the year-ago period.

This growth in the IT segment is enabling SABRE to post some impressive numbers. Its revenue for the third quarter of 1998 was 32.2% higher than the year-earlier period. In 1997, TSG provided 9% of AMR's revenues; in the first nine months of this year, that increased to 12%. Its pre-tax margins are solid, at 18%, and better than most airlines. None of American's competitors have a similar property.

So, what's not to like? We can worry about the cyclical nature of the airline business all we want, but people are always going to fly home to see grandma, at least. And with a P/E of 9, and better margins and passenger yields than the industry average, American is likely to be a better investment in the airline industry than its competitors.

Next: The Bear Argument