When the local TV Reporter said American Airlines, AMR Corporation (PINK:AAMRQ), would be giving up its routes from a local ‘feeder’ airport last week, it sounded so dire, until the airport manager said the air carrier only had three flights in and out daily. So the last of the big airlines, AAMRQ, files for bankruptcy leaving only JetBlue Airways Corporation (NASDAQ:JBLU) and Southwest Airlines Co. (NYSE:LUV) as ‘virgins’ to the bankruptcy process.
So is there a buy-side to a company in bankruptcy? Yes, especially an airline. I learned most of this when United went bankrupt in the 80’s.
The first thing I learned was that the bond-holders would be taken care of first because they had ‘loaned’ and not ‘invested’ in the Company and equity holders would get what was left over; if anything. Back then, few bankruptcies “Traded Through” the process, but simply stopped trading; only to have to start all over again when the proceedings were over. Thankfully, that isn’t the case anymore. You can buy AAMRQ today if you want; while it’s still in court.
One thing the court did in the old United bankruptcy was take a thorough accounting of every tool in every hangar and it occurred to me that you get a precise knowledge of “Hard Assets” and their current value which reveals a real net worth on a balance sheet.
When the TV Reporter was talking about a loss of a “Destinations” for American Planes; that’s another ‘factual’ number that emerges; to how many destinations; and how profitable how are they? Shrinking destinations for air carriers tend to make them a more efficient and ‘lean and mean’ operation; like arranging new fuel options. A judge takes all this into consideration.
Carriers routinely buy future fuel contracts at a set price for 3-5 years so when oil moves; it is to their advantage: As if you could lock into $2.98 for a gallon of gas for your car while the general market was paying $3.25 due to a refinery performing maintenance tasks.
General Motors came out a better company after Obama let them reorganized instead of fail and since no one currently is going to acquire AAMRQ; it too has the possibility of coming out a better and stronger company.
American is currently trading in the $0.41 cent range, JetBlue at $5.49, and Southwest at $8.82. So what are the “Value Hunters” looking at?
Professional advice from a broker or advisor should always be sought in bankruptcy buys and a lot of due diligence is called for in my opinion including following the proceedings as close as possible.
I haven’t, don’t, and do not intend on holding any of the companies mentioned in this article.