Is the Airline Industry in Dire Straits?
American Airlines' parent company, AMR Corp (NYSE: AMR), filed for Chapter 11 bankruptcy this morning and also announced new changes to its board of directors. The company claims that the moves will ultimately benefit the company and will return it to profitability, but is there any legitimacy to this notion?
Airlines in general have been performing poorly in 2011. For example, Delta Airlines (NYSE: DAL) is down nearly 39% while US Airways is down nearly 53% for the year. Rising fuel costs, waning consumer demand, and aging equipment all play a large role in the airline industry's performance. Is there any hope for the future?
Over the years, airliners have had to sacrifice margins for volume. By cutting down on amenities and other complimentary offerings like food service, airliners have been slowly exhausting all avenues of cost cutting. Eventually, they had to significantly cut down on salaries and marketing expenses. It appears that these historically negative trends are still continuing, giving that various economists and analysts doubt if the industry will prevail again.
What may be the answer is a positive overall economy. Airliners are primarily suffering from a lack of customer activity. People are starting to drive to far destinations - valuing cash over time. If the economy was to get back on track, with higher employment and salary rates, people may be more willing to sacrifice an extra hundred dollars to save several hours.
Another important facet of the economy is commodity prices. Crude oil prices will have to be lower for airlines to prevail in the current climate. While this scenario is more realistic than a completely positive economic outlook, it appears that low crude prices may not be very feasible in the first place. For starters, they are currently trading in tandem with equities. Secondly, rising political tensions between Middle Eastern countries are sure to keep oil prices high, especially if conflict erupts in the region.
Chapter 11 will ultimately benefit AMR Corp, but not to the point that it will be profitable again. Chapter 11 will most likely end up shedding AMR's workforce and shutting down certain flight routes, but the company's fortune will come down to its customers. Customers will have to determine their comfort in spending money on airlines when the time, and economy, is right.
AMR has been halted several times today and is trading at about $0.29 at the time of publishing, down over 96% for the year.
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