Trade Opportunity – Is AMR stock ready to take off?

October 13, 2011 / Jeff McAllister

Recent developments between AMR management and its pilots union (the Allied Pilots Association: APA) suggest that this stock is finally ready to fly.

: Image via Wikipedia

In the past three weeks AMR stock has fallen dramatically. Rumors of potential bankruptcy and an overall inability to generate profits in a very competitive environment have beleaguered the stock’s price. Questions over competitive pricing and internal cost structures have made the investment community uneasy about AMR’s future.

Recently an unusually large number of pilots decided to retire early from service at AMR. Many thought this was an sign that the pilots had some inside information to suggest that the corporation was in fact planning on filing for bankruptcy. The truth was a reflection of what has happened in the marketplace over the past two months. Pilots at American Airlines who are 60 years of age or older when they decide to retire have the ability to lock in a portion of their retirements based on market prices up to two months in arrears. With little hope that the market was about to trend higher it simply makes financial sense for those who were scheduled to retire within the next six months or so to lock in the stock market valuations that were present back in late June and early July. Further, about 4 1/2 years ago the mandatory age for pilot retirements was increased from 60 years of age to 65. During those five years the economy and the stock markets have been choppy at best. Pilot retirements dried up. This change in legislation caused a bubble of pilots who would have retired five years ago to now be at a point where they can or must retire.

In this past week, management of AMR has approached the union that represents the American Airlines pilots and conveyed their desire to make a concerted effort to end pilot negotiations this week. If AMR were interested in bankruptcy as a means to reorganize and reduce their cost structure there would be no need for a new contract. One that is very favorable to AMR and unfavorable to the pilots would be forced through the bankruptcy court system. AMR managed to stay out of bankruptcy when most other airlines went through bankruptcy after September 11. It appears that management has the resolve to once again avoid bankruptcy. This should be good news for the stock.

As an options trader, one has to wonder whether there might be some opportunities created by this recent development. With the stock trading at about $2.80 a share, one could certainly justify an outright purchase of the stock. Because there continues to be uncertainty in the airline industry it might make more sense to enter a collar trade. Perhaps even a Vegas style trade might be appropriate here.

I suspect that the volatility of AMR stock is about to increase. Keep your eye on the headlines as news of tentative agreements between AMR and its labor unions should send the stock higher.

Jeff McAllister
OptionsANIMAL Instructor

Disclaimer: I am a pilot for American Airlines. I am a member of the pilots union, the Allied Pilots Association. All of this information is publicly and readily available. I do have options positions currently in place on AMR. I have no intention of initiating any new positions within the next 24 hours.