According to the recent monthly results, bankruptcy has been good to AMR Corporation (OTCMKTS:AAMRQ). The company just reported a dramatic turnaround from last year for May and should signal that the combination with US Airways Group, Inc. (NYSE:LCC) will be a very profitable one.
The airlines expect to finalize the merger in the next few months, which will lead to numerous synergies estimated at around $1 billion. Apparently though, the bankruptcy filing by AMR will be the most significant event in the merger as AMR has been able to dramatically improve results due to lower costs.
Improved results
With the dramatically improved results for May, AMR Corporation (OTCMKTS:AAMRQ) has been able to turn a huge monthly loss last year into a solid profit in 2013. The CEO predicted a profitable quarter, and the company should benefit from the typically strong June. Even while reporting large losses last April and May, AMR was able to show profits of $33 million in June so this year should be even better considering May generated $65 million in profits.
In that case, AMR will report the first profitable Q2 since prior to the financial crisis in 2007.
The profits in May were achieved from a $120 million cut in expenses alongside a $51 million reduction in revenue. The airlines are finally focusing on more passengers on fewer routes to boost profits. This concept, which all but eluded this sector for decades, has finally taken hold. The really impressive part is that these productivity improvements have all taken place prior to the US Airways merger thanks to the benefits of filling for bankruptcy.
Competitors not seeing same benefits
Of the other three big airlines, including US Airways Group, Inc. (NYSE:LCC), which is close to finalizing the merger with AMR Corporation (OTCMKTS:AAMRQ), only Delta Air Lines, Inc. (NYSE:DAL) expects improved results year-over-year in Q2. Both US Airways and United Continental Holdings Inc (NYSE:UAL) expect lower results this year. Considering the history of the airlines, being able to compare yearly profits is almost unheard of in this industry.
Analysts expect Delta to earn $0.94 during Q2 compared to only $0.69 last year. United earned $1.41 last year and expects to see a small drop off to $1.38. US Airways expects the largest drop going from $1.61 in Q2 last year to $1.46 this year.
Forward multiples
Now that the airlines are putting together multiple years of solid earnings and the weakest link in AMR Corporation (OTCMKTS:AAMRQ) is about to turn a rare profit during the second quarter of the year, the market might need to start reconsidering valuation multiples. As of now, all the major airlines are trading at multiples of 6 times 2014 earnings or lower. As the chart below shows, even using the 2013 estimates only United Airlines tops out above 8 times earnings–an earnings multiple that remains considerably below the 15 to 16 times for the market as a whole.
DAL Forward PE Ratio data by YCharts
Bottom line
As the weakest link in the airline industry starts turning in profits even prior to finalizing the merger with US Airways Group, Inc. (NYSE:LCC), the industry as a whole should benefit. Investors need to reconsider the airline industry and possibly start using more normalized earnings multiples for an industry that has historically struggled. On top of that, the dramatically improved results at AMR Corporation (OTCMKTS:AAMRQ) augers well for the combined financials of the new American Airlines. US Airways Group, Inc. (NYSE:LCC) already trades at the lowest multiple and could be in line for an expansion of that multiple along with the industry as a whole.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Bankruptcy Has Been Good for American Airlines originally appeared on Fool.com.
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