American’s Stock Hits Turbulence on Pilot Retirement, Bankruptcy Concerns

American Airlines (NYSE:AMR) took a 30% dive on Monday as bankruptcy concerns for the beleaguered airline resurfaced with a large number of pilots retiring this September, at almost 10 times the monthly norm. The shares have recovered some since Monday but remain volatile given the high level of nervousness about the company’s financial position and the industry as a whole.

The carrier expects 300 to 400 pilots to retire by year end and is readjusting capacity downward to match the reduced headcount in the fourth quarter. The rumors that the airline may seek bankruptcy protection have been making rounds for a while now as the airline has a burdensome cost structure compared to peers like Delta Airline (NYSE:DAL) or United Continental (NYSE:UAL). The recent uptick in pilot retirements have only added to AMR’s worries as it continues to post losses while facing a potential recession and slowdown in demand.

See our full analysis for American Airlines

Higher Number of Retirements Hurts Sentiment

The higher number of pilot retirements has negatively affected the sentiment for the stock as it indicates lack of confidence in the airline’s future by its workforce.

Under the contract provisions, a portion of pension is tied to AMR’s stock value where an employee can take the best share price of the previous 60 days. The higher than normal level of retirements indicates that employees are trying to protect their share price-based pensions in the event the company slides toward bankruptcy and/or a recession leads to a slump in demand and the share price for a considerable time. See AMR May Seek Bankruptcy Protection as Labor Talks Hit Impasse.

The airline also supports some underfunded defined-benefit pension plans where pilots have the option to take a lump sum or an annuity. Since pilots are increasingly picking up the lump sum option, this could threaten AMR’s liquidity position in the near term as more pilots retire.

European Union Carbon Emissions Levy

Adding to concerns, the EU confirmed its plans to implement the Emission Trading Scheme (ETS) regime at the beginning of 2012, bringing all major airlines flying into and out of a European destination, under its purview.

The decision was strongly condemned by the U.S. and about 25 other countries that rallied against the new levy as it threatened to hamper recovery and further dent the airline sector’s profitability. The move is expected to push up costs for major U.S. airlines like Delta Airlines, United Continental, and American Airlines that have meaningful exposure to Europe. See our note EU’s New Airline Carbon Emissions Levy Could Cost Industry Over $20bn by 2020

We currently have a $5.65 price estimate for American Airlines, which is under review in light of recent events.

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