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

Reading Rick's doom-and-gloom, you'd think American Airlines is about to relive a cheesy '70s Airport melodrama, complete with the forgotten TV celebrities that used to appear in those disaster movies. AMR may make mistakes or have a bad year, but the idea that it's headed for a "water landing" is a bit much.

Let's look at Rick's criticisms. He notes that there's a new CEO at the helm, which could be a good thing given former CEO Crandall's apparently autocratic reign. Yes, change introduces uncertainty, but it can also be a catalyst for positive developments. Simply letting your knees knock because there's a new CEO is overreacting.

Then Rick notes that one of the new CEO's first moves was to buy Reno Airlines, a purchase which I praised in my initial argument and Rick criticized in his. Rick's probably still jumping all over the acquisition in his rebuttal, so the question is, was buying Reno a smart idea or not? I would argue that if they can use it to drive customers to longer-haul flights, it might turn out to be a smart one. More importantly, Rick's criticism is contradictory and revealing.

He argues that AMR tried to compete for West Coast traffic before and failed, but then quotes an airline analyst saying that AMR "walked away and let United and Southwest basically carve up California, and they now realize they made a big mistake." Well, if it was a big mistake to "walk away" from California and let those other airlines reap the profits, shouldn't they try to rectify their error by going back in, however late they may be? If the question is, should an airline company that purports to be nationwide compete for West Coast business, the Seattle to San Jose flights and so forth, then I think the answer is obvious: of course, they should.

Rick also maintains that AMR is in trouble because of problems in Latin America and Asia, but this applies to other airline companies as well. Passenger yields for AMR were down 12.5% in the Pacific region in the third quarter this year, versus the year-ago period, and down 6.7% in Latin America, yet the decline in the Pacific region for United was 20%, and in Latin America 10%.

This gives us a hint as to what the real issue regarding AMR is: its industry. Hoover's estimates that the airline industry is growing at 8% a year, which is not exactly breathtaking. Profits overall can be tough to come by. Between 1990 and 1992, for example, airlines lost more money in just those three years than the entire industry had made in the previous 67 years. As a result, the question for investors is whether they want to invest in this industry. If so, then AMR has plenty going for it.

Finally, let's remember everything Rick didn't comment on: The SABRE Group and its rapidly growing revenues; the higher passenger yields AMR is able to earn compared to Delta or United; and the international oneworld program and the deal with Boeing. American is unlikely to show major growth in the next couple of years, but it is much more on top of its business than Rick suggests.

Next: The Bear Responds