American Airlines' stock plunged to an eight-year low on fears of a weaker economy — which hurt other airline shares — and speculation that the carrier would seek bankruptcy protection.
A combination of factors drove down shares Monday. Wall Street analysts suggested that American turn to the bankruptcy court to lower costs. Investors were also spooked by a report that showed a slowdown in air travel and cargo. Shareholders, in addition, weighed an announcement that more than ten times the normal number of pilots is retiring from American. That's a signal to some that pilots are fearful about the carrier's health.
Shares of AMR Corp., American's parent, tumbled 33 percent, closing at $1.98. Shares have not closed below $2 since March 2003. Trading of the Fort Worth, Texas-company was halted seven times Monday because of extreme volatility. Stocks for the entire U.S. airline industry fell 9.8 percent.
AMR's stock price has fallen 75 percent since the start of this year, while industry shares have dropped 41 percent.
Morningstar airline analyst Basili Alukos was among those advocating that American seek bankruptcy protection.
"For a long time, I've thought that the company has been at a disadvantage," Alukos said in an interview.
Alukos doubted that American can bring down its labor costs or high debt payments without going through bankruptcy court. American's competition has already gone through that process and reduced those costs.
American is the only major airline that has lost money this year — $286 million in the second quarter alone. It is the country's third largest carrier, flying about 275,000 passengers a day on 3,400 flights. Its largest operations are in Dallas, Chicago, Miami, New York and Los Angeles.
Even if the airline were to file for bankruptcy protection, passengers are likely to see little change.
When Delta and United went through restructuring in the last decade, flights went off normally and frequent flier miles remained intact. Shareholders and bondholder were wiped out. Many employees had their salaries and pensions reduced.
In an effort to return to profitability, American has been rapidly replacing its gas-guzzling jets with newer, more-efficient planes. It recently announced plans to sell its unprofitable regional airline, American Eagle.
The airline in a statement said bankruptcy "is certainly not our goal or our preference. We know we need to improve our results, and we have a sense of urgency as we work to achieve that."
Ray Neidl, an airline specialist with the Maxim Group, said Monday's stock price drop was "a tremendous overreaction."
"American does have big problems to solve, but they have plenty of time to do it," Neidl added.
The carrier is expected to end the third quarter with a healthy $4.2 billion in cash reserves, but in a note to investors Monday morning, Alukos said the airline may ultimately fail to pay some bills.
AMR had about $9.8 billion in liabilities as of June 30. While Delta had $12.8 billion in liabilities and United had $12.76 billion, both are twice the size of American.
Factors leading to Monday's stock plunge were:
— The International Air Transport Association said that the industry may be headed for a downturn because of a weakening economy.
— A Wall Street Journal column suggested bankruptcy protection as one of American's options.
— Worries about $726 million the airline borrowed last week. The airline paid a pricey 8.75 percent interest rate at a time when rates are historically low.
— Some on Wall Street viewed high numbers of retiring pilots as a sign that senior employees are worried about American's future. At the start of the weekend, 129 pilots put in their retirement papers. The prior month saw 111 pilots retire. During a typical month, 10 retire. Speculation was that pilots wanted to take a lump sum payment on their pension, avoiding a cut in benefits like those seen during United's bankruptcy.
David J. Bates, president of the pilots union for American, dismissed that notion. A provision in the pilots' retirement benefits allows them to lock in the value of some of their investments going back 60 to 90 days, so pilots who retire now can avoid this summer's stock market slump.
"A lot of it is pure economics," Bates said.
Bates reiterated his confidence in the company's finances saying, "I don't see any immediate liquidity concerns."
Not everybody sees the airline heading to bankruptcy court.
"Management has indicated time and time again that they have no interest in filing," said Helane Becker, an analyst with Dahlman Rose.
While most major U.S. airlines filed for bankruptcy protection early last decade, American chose to avoid restructuring. It also avoided a reorganization when fuel prices spiked and travel declined in 2008 and 2009.
Jim Corridore, an airlines analyst with Standard & Poor's, said that despite its losses, the airline has not "been burning through an unreasonable amount of cash."
"For this reason," he said, "we would be surprised by a bankruptcy filing in the next 12 months."