AMR Bear's Den
by Rick Munarriz ([email protected])

In a few years, the airline industry will be replaced by a faster and more reliable mode of transportation. We'll ride in pods moving at the speed of light on a hyper-tech highway of light. Okay, just kidding. Air travel is here to stay. I can't argue that what the future holds for bullet trains or sci-fi human teleportation will make airborne masses of titanium and gauges obsolete. I can't tell you, with a straight face, that airplanes will be replaced the same way they took over the motorized car and railway system earlier this century. The skies were made for coasting. However, not all airlines are created equal. AMR is the second largest domestic carrier and a trip to the lavatory confirms that it does indeed smell like number two.

We have a company that is coming into a little bit of turbulence right now and the debt-soaked balance sheet cannot be used as a flotation device. In May, longtime CEO, President and Chairman of the Board Robert Crandall disembarked. With his departure came the arrival of Don Carty, a promoted wildcard until proven otherwise. Are investors who were used to Crandallized navigation, albeit sometimes flawed, feeling safe hopping onto this stock with Pilot Carty?

No transition of power is ever easy, especially when a company is behind the times. Change will come, for better or for worse. American Airlines is big. So big, in fact, that it's stodgy. It is not the nimble dynamic darling that Southwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> has become. It does not have the might of United <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %>. It's a clumsy behemoth, costly in operations and lethargic in motion, and even the most ardent of bulls must be biting his or her nails over the newbie at the helm.

Where is Carty headed? The initial view from the top is not encouraging. Last month AMR announced the long-rumored deal to acquire Reno Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RENO)") else Response.Write("(Nasdaq: RENO)") end if %> to get back into the business of flying folks up and down the West Coast. I'm sure it knows the road to San Jose since back in 1986 the company bought Air California for the very same reason. After a few years of failure it cut its losses and moved on.

"They walked away and let United and Southwest basically carve up California, and they now realize they made a big mistake," said PlaneBusiness.com Editor Holly Hegeman.

Playing catch-up by buying a struggling regional carrier that was in the red until just recently is certainly not the answer. Neither is the possibility that AMR will alter Reno Air's value pricing strategy, which was the only reason that the fledgling bit player was able to compete against the cost-control mavens at Southwest.

Thinking small is not going to help AMR. The company has been stubborn, with internal strife still lingering from the short-lived pilot strike last year after three years of bitter negotiations. That has cost the company the opportunity to make a move into regional jets like Delta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> and United have done with elaborate codesharing agreements with regional carriers. While American Eagle is now taking delivery of regional jets, it is too little too late. Even CFO Gerard Arpey called the company "plane constrained" earlier this year. Opportunity has left the gate without AMR.

So why buy a laggard? I imagine that my fellow Fool pointed out how the company is trading at just 9 times earnings. Of course! This is a cyclical industry, peaking. Fellow flyers like United and Delta also fetch single-digit multiples -- and seem better fit to adapt. Investors know that eventually interest rates and oil prices will rise, the economy will slow, and those P/E multiples will rise even as the shares fall given softer earnings.

But the problem with AMR also carries a passport. The company was flying high this summer until a Donaldson, Lufkin & Jenrette downgrade sent the shares on a gradual descent. The analyst's pessimism stemmed from AMR publicly admitting that there was a bit of cabin pressure in the Asia and Latin America markets. AMR has situated itself to take the full brunt of economic meltdowns in these emerging markets and it was only a matter of time before the global flu hit the propeller fan.

Next week, AMR ticket agents will announce whether or not they will unionize. It is the only labor division of the airline that is presently not organized. Clearly a unified front would mean higher wages and better benefits for the gate agents -- and higher costs and lower margins for AMR. It's a shame. Hegeman concedes that AMR has "the best revenue management system hands down" but with higher overall costs than most competitors.

Then again, isn't milking patrons dry what drew them towards the more vibrant Southwests of the world? Will they give that Reno Air paint enough time to dry before they spray AirCal on those MD-80's and relive past mistakes? Some folks have a fear of flying. I have a fear of owning shares of AMR. The landing strip is crowded plenty and the control tower is nowhere in sight.

Next: The Bull Responds