Markets & Finance

AMR Climbs Out of the Red


The parent of American Airlines posted its first annual profit in five years on Wednesday

It's been a long time since anyone could write this: American Airlines posted an annual profit. Okay, it was a small one and it took five years. But big U.S. airlines have struggled for so long -- bedeviled by a high cost structure, fuel spikes, and a post-September 11 travel slump -- that the Jan. 17 announcement by American Airlines' parent AMR Corp.'s (AMR) seemed like a small triumph.

CEO Gerard Arpey announced a net profit of $17 million for the three months ended Dec. 31, 2006, beating by a long shot a net loss of $409 million during the same quarter of 2005 (excluding a $191 million net charge for special items.) "By producing a fourth quarter and full year profit for the first time since 2000, the people of American Airlines made 2006 a proud milestone in our ongoing turnaround," Arpey crowed in a press release Jan. 17.

Conditions have improved for airlines recently. As energy prices sank in recent months, AMR paid $120 million less for fuel during the fourth quarter than it would have paid at prices prevailing from the prior-year period, for example. Arpey has also managed some feats, such as slimming his company's total debt burden by 8.5% year over year to $18.4 billion during the quarter.

The recent results come after Arpey battled for years to get the sprawling the Fort Worth-based carrier into shape. As fuel costs began to soar after Hurricane Katrina, for example, American installed devices on all of its 737s and many 757s to help their wings fly more efficiently. American estimates that move saves between 100,000 and 140,000 gallons of fuel annually per aircraft. AMR even arranged in 2005 to fly their planes directly over the North Pole on the new Chicago- to-Shanghai route when weather allows, a move that saves more than $3,000 per flight (see BusinessWeek, 5/8/06, "AMR: Making Every Gallon Count").

"We have a lot of work left to do, but the track we are on today is the right track to position our company for long-term success," Arpey said in the press release.

Market players had expected worse. The mean analyst forecast had been for Arpey to lose 13 cents per share during the quarter, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial. AMR actually earned 7 cents per share.

AMR's share price fell 2.5% to $39.24 on the New York Stock Exchange in late afternoon trading Jan. 17. Earlier the same day, AMR had traded at its high of the year of $41 per share before investors decided to take some profits. Investors sold others in the industry, such as United Airlines' parent UAL Corp. (UAUA), amid a rise in oil prices.

"We think AMR showed extremely strong improvement and, with the recent drop in fuel costs, it is likely to post strong '07 results," Standard & Poor's equity analyst Jim Corridore said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) "We also like AMR's focus on debt reduction and what we see as its strong cash position." He hiked his forecast on the company's earnings for 2007, bringing his target price to $50 from $30 per share. He also upgraded the stock to buy from hold.

AMR ended 2006 with $5.2 billion in cash and short-term investments, compared to a balance of $4.3 billion at the end of 2005.

Maybe American Airlines can soon begin to post profits every quarter. The sky's the limit.


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