AMR Fuel & Cash Guidance of Little Help (AMR)

AMR Corp. (NYSE: AMR) has come out with many projections today in a filing.  The company is out at the Merrill Lynch Global Transportation Conference.

Second quarter mainline unit revenue is expected to increase between 6.0% and 7.0% year over year, with second quarter consolidated unit revenue expected to increase between 5.9% and 6.9%.  AMR noted that its Cargo and other revenue is anticipated to increase relative to second quarter 2007 at a slightly greater rate than unit revenue.  AMR expects cash and short-term investment balance at the end of the second quarter of approximately $5.0 billion, including approximately $426 million in restricted cash and short-term investments.

Fuel Hedge Position:

• Q2-2008: Hedged on approximately 36% of consumption at an average cap of $70/bbl WTI Crude ($2.38/gal. jet fuel equivalent).
• FY-2008: Hedged on approximately 33% of consumption at an average cap of $78/bbl WTI Crude ($2.55/gal. jet fuel equivalent).

What is interesting is that the company is forecasting its fuel costs ahead as well as its consumption of fuel.  The company gave April actual fuel costs of $2.93/gallon on 224.6 million gallons and May at $3.19/gallon on 261.1 million gallons.  For June it is forecasting a cost of $3.46/gallon for 257 million gallons; and that brings its net Q2 cost average to $3.20/gallon for 762.7 million gallons.  As far as fiscal 2008, AMR is forecasting $3.38/gallon on average with a total consumption of $3.0037 Billion gallons.  In short, the company is telling you that it sees its fuel costs being $10.15 Billion for all of 2008 based upon the current environment and based upon what amount it has been able to hedge.

The head of investor relations was not available for comment as he is in New York for the Merrill Lynch Global Transportation Conference.  The good news is that this cash balance does look a tad better than when we tallied up the cash burn rates over the last two weeks. The key word is the "tad" part.  This unfortunately doesn’t change the odds in the current environment that AMR or other airlines will face that Chapter 11 late in Q4-2008 or early in 2009. 

We noted again in our "10 Stocks Under $10" on may 27 that AMR may not be able to avoid Chapter 11.  As a reminder, that doesn’t mean a grounding and implosion.  But unless fuel prices change drastically this may become self-fulfilling as forward fuel hedges are just too expensive and would just further bite into most carriers’ cash balances (including AMR).

The current environment is actually rather simple when you remove the emotions out of the equation.  Airline ticket prices have to rise even more than they have and they have to be able to nickel and dime you every step of the way.  Forget the blankets and pillows, forget the peanuts, forget the freebies, expect to pay more….. and don’t count on any comforts.

If you think cash is tight right now, these carriers better all be happy as hell that the Dreamliner has faced delay after delay.

Wall Street isn’t exactly giving this a ringing endorsement as shares are down 2% right after the open at $5.59.

Jon C. Ogg
June 18, 2008