American Airlines Bankruptcy Doesn’t Mean the Sky is Falling
by Jeannette Di Louie, Investment U Research
Tuesday, December 6, 2011
AMR Corporation (NYSE: AMR), American Airlines’ parent company, just filed for bankruptcy.
But don’t panic at the news; this isn’t one more sign of a bad economy getting worse or, at best, staying stagnant. This is just the sun rising in the east and setting in the west.
Really, airline bankruptcies are that common. Hence the reason why MarketWatch saw fit to mention that “AMR’s bankruptcy filing Tuesday marks the 100th time a U.S. carrier has moved to reorganize its finances since 1990,” 40 of which have been since 9/11.
Sure, that lengthy list holds a lot of small company names that the average American has never heard of. But it also includes bigger businesses such as Delta Air Lines, U.S. Airways and United Airlines, some of them several times over.
Essentially, this is what airlines do. They go bankrupt.
The only real surprise is that AMR managed to somehow stay solvent so long when everybody else was tanking after 9/11.
What’s Wrong With the Airline Industry
With so many failings, it’s a waste of time to argue whether something is wrong with the U.S. airline industry. That much is obvious.
What isn’t so obvious is exactly what. After all, as economists Clifford Winston and Professor Steven A. Morrison noted back in 2005, U.S. airlines flew nearly three billion passengers between 2001 and 2004… Yet they “lost an average of $13 on each one generating more than $32 billion in losses.”
And of course, things haven’t gotten any better since then. Only a short while after potential passengers got over their 9/11-inspired fears of flying, the economy turned south and so did the number of vacations and business trips people took.
But as the last three decades show, the economy is only a partial player in this problem.
Winston and Morrison, for their part, presumed that the very nature of the business dooms it to a sub-par existence. Ordering airplanes, they argued, is a costly process that takes too much time between making the purchase and receiving it… long enough for trends to change and the purchase to become unnecessary.
They’re right in pointing out that nobody can predict the future. (After all, how many times in the last two years have you read the words “worse than expected” in an economic report?) However, any CEO worth his or her salt should not only consider that dilemma before making any large purchases, but should also have a backup plan in case things don’t work out as expected.
Less Pie to Go around and Other Theories
Matthew Philips, who writes for Freakonomics, much more recently took his own turn at explaining the conundrum of U.S. airline company failures. And his theory is even less flattering to the industry.
Quoting Berkeley economist Severin Borenstein more than anything else, Philips theorizes that it was all Ronald Reagan’s fault for deregulating the industry over 30 years ago. By doing so, he says, it allowed low-cost carriers to snatch their piece of pie in the sky, leaving less room for monopolies and therefore for profits.
If that’s true and the larger airlines really can’t stand up to some added competition then, once again, they’re very poor businessmen who deserve to go bankrupt. In fact, the only one that puts them in a flattering light is the idea that the high cost of jet fuel and the burden of additional taxes eat into the earnings they would otherwise be enjoying.
Regardless of the reason, from an investor’s standpoint, don’t worry too much about AMR’s unfortunate declaration. Feel free to panic at any of the other negative news coming out of Europe, the U.S. and elsewhere, but this news isn’t worth your worry.
Though you might want to think twice before you buy into an airline.
Good investing,
Jeannette Di Louie
Article by Investment U