On Tuesday, American Airlines parent company joined those that filed for Chapter 11 bankruptcy. High fuel prices, over $800 million labor costs and competitors winning the airline’s business travelers over caused its defeat. Despite the filed bankruptcy with a cash stockpile of $4.1 billion, the company said buying new aircraft from Boeing and Airbus is still feasible. It may resurface as a tough contender by 2012’s end said Stern Agee analyst Jeff Kaufmann.
The airlines may stop non-profitable routes services and cut its presence at airports like Chicago O’Hare and San Francisco International. This could result to increased prices and give its rivals more profit-earning opportunities more so for its toughest competitor, United Continental Holdings. Airline analyst Savanthi Syth believes American plans to shrink its Caribbean and Latin American routes from its Miami hub. This could push JetBlue’s 6.3 million seats higher if American pulls back its 11.2 million seats in the region.
Despite attempts to make more money, tough competition was a hurdle. Fund manager Craig Hodges said that this could be similar to 2003 when demand was coming back and there were only 4 of them. Companies like Union Pacific traded at $30 per share after the consolidation. In 2007, Union Pacific grew 108% against S&P 500 index’s 65% within the same period.
The airlines that used to be last to refurbish aircraft said that will change. Syth said over 200 older McDonald-Douglas planes and 120 Boeing 757s may be updated. While in bankruptcy, American said it will lease 24 older planes hand and refurbish or replace current aircraft. Michael Sansoterra of RidgeWorth Large Cap Fund Analysts said it will be beneficial to suppliers of services and parts like bolts, aircraft interior plastic lining and drink carts used by flight attendants. The companies that may benefit include new or upgraded planes supplier, BE Aerospace whose stock went 5.8% higher. It shares the market with French company Zodiac. Other than BE Aerospace owned by Sansoterra’s funds, he also owns $23.7 billion Precision Castparts Corp, maker of weight-sensitive fasteners, bolts and other parts for Airbus and Boeing wide-body aircraft. Precision is 18.1% up this year pushing Sansoterra’s fund 1.2 percentage points higher than S&P 500 in the same period.
The parts are weight-sensitive, which helps make the planes decidedly more fuel-efficient. The company is up 18.1 percent this year, one reason why Sansoterras fund is 1.2 percentage points ahead of the S&P 500 over the same time frame. Analysts said airport-revenue municipal bonds rely on parking, concessions, landing fees and terminal rentals to earn and pay investors. Aggressive competitors are believed to easily fill the gap in airports like Chicago or Dallas should American reduce services there.
Evercore Wealth Management’s Howard Cure said investors confuse airline industry problems with airports a lot. He said the high cost and the high competitive airport industry goes up or down with tourism or fuel prices which is different from how airports operate. Commonly, airport revenue bonds are higher by about 20 percentage points than water/sewer revenue bonds, said Cure. With rare airport bond defaults, investors are likely to earn without having that many risks, added Cure. There are beneficial tax advantages too when investors buy home state airport bonds.