By Sarah Morgan
American Airlines stock crashed today on news of the company’s bankruptcy filing, tempting some investors to bet the carrier will take off again. But pros caution individual investors against speculating in the floundering airline.
After filing for Chapter 11 bankruptcy, shares of AMR Corporation (AMR), the parent company of American Airlines, fell nearly 80% Tuesday and are currently trading at about 34 cents. Just yesterday, these shares were worth a comparatively rich $1.62. But despite this bargain price, the stock faces a lot of turbulence before it can ever get back off the ground – if it ever does — investing experts say.
Stocks worth less than a dollar are generally considered “penny stocks,” typically trading over the counter instead of on major exchanges, and while most brokerage accounts allow individuals to trade them, they’re considered much riskier and may be much more volatile than pricier stocks that trade on major exchanges. Some brokerages, however, will charge additional fees to process trades in these shares, and in some cases may cease processing trades at all.
In the case of a company like AMR, would-be speculators should keep in mind that common-stock shareholders are last in line to recover money in a bankruptcy. Creditors and bondholders come first. And those shareholders may never be rewarded, given AMR’s high debt loads, says Basili Alukos, an airline analyst with Morningstar. In fact, Morningstar issued a report saying the shares were worth $0 on Oct. 21, because the company appeared headed for bankruptcy. “Ultimately, there isn’t any leftover value in the company, so the shares will be worthless,” Alukos says.
While it’s unclear if, or which, hedge funds or professional investors bought shares today, several recently scooped up penny shares of MF Global after the brokerage filed for bankruptcy.
Investors have plenty of airline-industry bankruptcies to look to as precedents in this case, says Jamie Cox, a managing partner at Harris Financial Group. And in those previous airline bankruptcies, common shareholders have been completely wiped out. Newly reorganized companies can start from scratch with new IPOs, but that does nothing for their former shareholders. That’s what’s likely to happen with AMR, too, Cox says. “There’s really no future for the shares,” he says.
In fact, high operating costs make the entire airline industry a risky place to invest, Cox says. The older an airline is, the more aging planes and accumulating labor costs make it difficult to eke out a profit as ticket prices continue to fall, he says.