Buying American Airlines stock at a bargain akin to waiting for Godot

Dear Mr. Berko:

Some people are buying 10,000; 25,000; or more shares of American Airlines at 45 cents to 55 cents a share because they think it will recover when American comes out of bankruptcy. If not, then they figure the stock can go up to at least $1, and they can double their money.

What do you think of me buying 20,000 shares at 50 cents and selling it if the company comes out of bankruptcy or, at the very worst, selling it for $1 and doubling my money?

ML, Erie, Pa.

Dear ML:

American Airlines (AAMRQ.PK-48 cents), founded in 1930, grew by pursuing acquisitions and expanding overseas and was the biggest airline in the world until 2008, when United merged with Continental and Delta. American has 78,000 employees, and in a recent chapter 11 filing claimed $30 billion in debt and $25 billion in assets.

There will be reductions in flight schedules, and jobs will be slashed, but American will still take reservations, honor tickets and operate flights for its 238,000 average daily passengers (or "cattle count," as some airline bosses refer to their customers). However, American will delay spin-off American Eagle, which was planned this March, so that this asset can be included in the final American balance sheet.

The company insists that it wants to go ahead with its plans to purchase 460 passenger jets from Boeing and Airbus, but how it intends to finance this multi-billion dollar purchase is beyond my pay grade (unless they borrow the money from Fannie Mae, the European Central Bank and Freddie Mac). The new planes would reduce American's fuel costs by 19 percent, but completion of the purchase contract is subject to the bankruptcy court's approval. And while the bankruptcy court might approve the purchase, the involved lending institutions gotta be blind, drunk and dumb beyond measure to loan money to American as long its intransigent unions are involved in American's labor costs. Look at what the unions have recently done to other airlines, Boeing, General Motors, Chrysler and numerous municipalities and worker's pensions across the nation.

Meanwhile, all stockholders are wiped out, and American has a negative book value of about $5 billion. While the shares still trade, they do not in any way reflect the current or future value of American Airlines. They have no voting power. They can't collect future dividends. And when American goes public again with clean shares, the current certificates have zero claim to new equity or profits.

For a while, though, there will be tens of thousands of fools who insist this American Airlines trash will have value, and there'll be a dozen willing market-makers who will not disabuse them of their foolishness. These fools will buy 10,000 or 20,000 shares, so this chad (there will eventually be holes punched in the certificates) could trade higher, as these fools convince even greater fools that the certificates will eventually have significant value. Look at what happened to the old General Motors certificates, which aren't even attractive enough to frame.

Eventually, the fools will recognize Pablo's Economic Rule of No Return, wherein Pablo walks a mile to a well to draw water and discovers that it's dry, so Pablo, he "no return." Eventually, the fools will become tired of waiting for Godot, and the trading volume will begin to fade. And eventually, the dozen or so current market makers will fold their tents as they realize there's no return, and the fools who bought American at 45 cents or 75 cents will get tired of waiting and exchange their shares for a tax loss in 2012.

The shares trade at 48 cents, and it's a plausible extension of reality that some fools remain who might be willing to purchase them from you at a higher price. As long as there are fools out there who want to buy and sell something, there will be always be a middleman to help that fool do it.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at Visit Creators Syndicate website at

2011 Creators Syndicate Inc.

Published: Wed, Jan 18, 2012