AAMRQ: Important Events Synopsis

A series of events took place in American Airlines, a subsidiary of parent company, AMR Corporation ( AAMRQ ) in the last few days. Importantly, the company received federal bankruptcy judge’s approval for three union contracts, based on which American Airlines was allowed to cancel its old labor contracts and introduce new working terms and conditions.

The company, attempting to revive under bankruptcy protection, filed in November 2011, will resort to action with stringent measures including retirement benefits reduction, increase in maximum working hours for pilots, termination of supplement retirement plan, reduction in flight attendants and ground workers staff, and closing of a maintenance hub in Texas. It is anticipated that these actions would save roughly $1 billion annually for the company.

Apart from cost reduction efforts, American Airlines is also working towards increasing its revenue base without the need for spending on flight additions. The company is relaxing revenue-sharing terms with other airlines, especially to boost outsourcing.

Recently, a four year deal was signed with SkyWest Inc, who will take over flights being operated in Los Angeles and Dallas by American Eagle. SkyWest will fly as many as 23 50-seat Bombardier jets for American Eagle.

Apart from this major announcement, AMR Corporation also came out with its August 2012 Revenue and Traffic results recently. Consolidated passenger revenue per available seat mile (PRASM) went up 4.1% in the month compared with its prior-year period. Roughly as many as 9.6 million passengers travelled/ boarded the planes in August.

Consolidated traffic increased 0.1% year over year with domestic traffic settling 0.7% below the prior year level and international traffic moving up by 0.6%. Consolidated load factor went up 1.4 points to 85.8% with domestic load factor increasing 1.1 points to 87.2% while international load factor came in at 85.8%, up 1.7 points year over year.

The current Zacks Consensus Estimate for the third quarter of 2012 is 22 cents, representing a year-over-year growth of 145.8%. Estimates for 2012 and 2013 are ($1.08) and 79 cents, reflecting annual growth of 67.2% and 173.1%, respectively.

AMR Corporation currently bears a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating. Its prime competitor Delta Air Lines Inc. ( DAL - Analyst Report ) has a Zacks #4 (Sell) rating and United Continental Holdings, Inc. ( UAL - Analyst Report ) holds a Zacks #5 (Strong Sell) rating.