American Airlines Got Grounded

Rumors can be denied, but facts will not change. Once again, American Airlines AMR proved this to be correct.

Back in October, there were rumors that AMR might file for bankruptcy, and the rumors were denied by the company. On Tuesday, however, AMR did manage to file bankruptcy, and brought down its stock by 84% from $1.62/share to close at $0.26/share. For all the investors who bought the stock at this bargain price of $0.26/share, they should be reminded that common stock becomes worthless in a bankruptcy situation.

While AMR's stock may become worthless - no one, at least not yet, is betting that American Airlines will disappear as a company. We were also assured by the company that all the frequent flyer mileages will continue to be honored. The main goal of the bankruptcy was to help the airline cut labor cost and to reduce its debt burden.

The AMR's bankruptcy thus brings an interesting dilemma for investors in the airline industry. Will AMR's bankruptcy help American Airlines emerge to become a strong competitor, or will it render the company less capable, thus benefiting its competitors? At this stage, however, it's really too early to know. If AMR were to cut its shorter routes and focus on the longer hauls, it will certainly benefit airlines such as Southwest Airlines LUV, JetBlue JBLU, etc., The benefits are less clear for major airlines such as United Airlines UAL if AMR emerges stronger and starts to undercut United on its long haul flights.

In any case, the airline industry - an industry which teeters with bankruptcy all the time - faces similar issues that AMR faces, such as high fuel cost, uncertain economy keeping travelers at bay, and deteriorating conditions in Europe and China which might impact transpacific and transatlantic flights, etc. Until the fog clears, we believe it's better for investors to wait at the lounge rather than making any big moves.