AMR posts second consecutive profit; eyes further debt-cutting opportunities

By Paul Deckelman

New York, Oct. 18 - AMR Corp., parent of the world's biggest air carrier, American Airlines, posted a profit for the third quarter ended Sept. 30 - its second consecutive quarterly gain, the first time that has happened in the six-year industry slump that started in 2000. The results were helped by a recent decline in fuel prices as well as higher revenues.

That left the company sitting pretty on a sizable cash position, giving it the wherewithal to bring down its debt - and to look forward to future debt reductions as well.

Fort Worth, Tex.-based AMR ended the quarter with a $5.5 billion cash cushion, $464 million of which was restricted. The company's total debt load, including the capitalized value of operating leases, was about $19 billion, and its net debt - total debt less unrestricted cash - was $14 billion, a $2.5 billion reduction from a year ago.

Chief financial officer Thomas W. Horton told analysts on a conference call Wednesday after the release of the numbers that third-quarter principal payments on long-term debt and capital leases totaled $220 million, with the year-to-date figure reaching $1.1 billion.

He said that the company had repurchased $128 million of debt since the start of the year, and "going forward, depending on market conditions, our cash position and other considerations, we may from time-to-time redeem or repurchase our debt, or take other steps to reduce our debt or lease obligations." He did not elaborate.

Horton reiterated later on in the call, during the question and answer portion of the proceedings, that that one of the more likely uses for the company's cash would be improving the balance sheet.

"We've done some of that this year" by paying down debt and "we're going to keep pushing the debt [lower], driving our debt down."

Considering asset sales

In response to an analyst's query about how the company planned to reduce debt - whether it would just use operating cash flow, or might issue equity and use those proceeds for debt reductions - Horton said that "we have a number of assets in the company that we from time-to-time think about [selling]." For instance, he said, AMR owns 30% of ARINC, an Annapolis-based communications company that primarily serves the major airlines, several of whom in addition to AMR own stakes, and the U.S. military.

"If that were to be sold, there's obviously some potential proceeds there that we could deploy towards balance-sheet improvement. And we think from time-to-time about our other range of assets, and how best to structure them for the long-term shareholders' benefit. We think about those things, but at the end of the day, we are very thoughtful about running and building the business for the long run."

Horton declared that "we think we've made some good progress on improving the balance sheet," and might pursue "those other avenues, for maybe some more opportunity."

However, he also said that other possibilities for spending some of the cash included increasing AMR's pension-fund contributions, and capital expenditures, particularly on new aircraft to replace the old MD-80 jetliners that it has retired.

6 cents per share earnings

AMR posted net earnings for the quarter of $15 million (six cents per share), a solid turnaround from the year-earlier loss of $153 million (93 cents per share), as revenues rose 6.6% to $5.85 billion from $5.5 billion a year ago.

Without a large one-time special charge against earnings, the company would have earned $114 million (45 cents per share), beating Wall Street's expectations of ex-items earnings of 42 cents per share.

The special charge totaled $99 million, and was related to a reduction in the book value on outstanding fuel hedging contracts, although Horton said that AMR expects this non-cash charge "to largely reverse itself in subsequent quarters."

Hedging contracts are a way of life for American and other large airlines. One of their single largest expenses is fuel; soaring jet fuel prices hurt bottom lines throughout the whole industry and helped push several American rivals, such as Delta Air Lines Inc. and Northwest Airlines Corp., into bankruptcy.

Horton said that the $99 million charge came about as a result of the recent significant drop in fuel prices.

The CFO pointed out that AMR's use of hedging instruments, such as options and collars, to blunt the impact of volatile fuel prices, had saved AMR over $300 million of fuel costs from 2003 through 2005, and so far this year, had saved it $66 million. He said that the recent decline has reduced the company's projected fuel costs for the second half of the year by more than $500 million, compared with the guidance that AMR provided back in mid-July when crude prices - and by extension, jet fuel prices - were at or near record high levels.

'Cautiously optimistic' on Q4

The company's chairman, president and chief executive officer, Gerard J. Arpey, told the conference call that looking ahead to the current fourth quarter, AMR is "cautiously optimistic, as the recent drop in fuel prices, combined with the continued unit revenue growth we've been seeing, bodes pretty well for the quarter."

He cautioned, however, that "obviously, fuel remains a wild card due to its volatility." So do security and terrorism concerns - highlighted by the summer discovery by British authorities of a terrorist plot to blow up aircraft using liquid explosives.

He said that the company's outlook for the fourth quarter is "much improved - but a good deal of uncertainty, I think it's fair to say, remains."

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