AMR to take $990 million charge

American Airlines parent writes down value of TWA and other acquisitions

October 08, 2002|By BLOOMBERG NEWS

WASHINGTON - AMR Corp., owner of American Airlines, will take a $990 million charge to write down the value of acquisitions such as Trans World Airlines Inc. and Reno Air Inc., widening losses at the largest airline company.

The write-down, effective as of Jan. 1 this year, resulted from an accounting rule change, AMR said yesterday in a Securities and Exchange Commission filing. The expenses are in line with what the company forecast in July. AMR will include the costs in year-to-date figures in its third-quarter results, without restating first- or second-quarter losses, spokesman Al Becker said.

AMR reported net losses of $575 million for the first quarter and $495 million for the second quarter as travel demand and fares slumped after the terrorist attacks last year. Analysts expect more AMR losses for the rest of this year, and Chairman and Chief Executive Officer Donald J. Carty said Friday that he doesn't expect the industry to recover next year.

"This was telegraphed," said Stephen Schwartz, a fund manager at Circle T Partners LP, which owns AMR shares and bought some of them a few weeks ago. "There's a lot more pressing issues in this market right now."

The airline's shares fell 56 cents, or 13 percent, to $3.76 yesterday on the New York Stock Exchange. They have declined 82 percent this year.

AMR shares might have dropped in anticipation of President Bush's speech last night about the possibility of war with Iraq, Schwartz said. Airline executives and analysts have said a U.S. war with Iraq might drive up prices for jet fuel, the carriers' third-largest expense, and decrease demand for international travel.

The war issue is prompting questions about a U.S. economic recovery and the outlook for airlines, said Ray Neidl, an analyst with Blaylock & Partners LP who has a "hold" rating on AMR.

The noncash expenses, resulting from an accounting-rule change, don't affect its cash flow or credit agreements, AMR said.

"Most of the good will that American carries is related to TWA," said Lehman Brothers analyst Gary Chase, who has an "underweight/positive" rating on AMR. "That acquisition occurred in an entirely different industry environment."

Since the day before the Sept. 11 attacks, AMR has lost about $4 billion in stock market value, according to Bloomberg data. The U.S. airline industry has lost $21 billion in value, or 60 percent, in the same period.

AMR bought Trans World Airlines in April 2001 for $2.8 billion in cash and assumed leases, and acquired Reno Air in 1998 for $124 million. The write-down also included goodwill from the purchase of ACI Holdings and acquisitions by its American Eagle commuter airline, AMR said.

In July, the company estimated a pretax charge of as much as $1.4 billion to write down goodwill. Adjusted for taxes, that's the equivalent of the write-down announced yesterday, Becker said.

The accounting rule, which went into effect last year, requires companies to periodically assess the value of good will in their financial statements and take write-offs when that value has declined. Goodwill is the difference between the price paid in an acquisition and the value of the assets.

Becker said the largest portion of the write-down was related to TWA because it was the biggest and most recent of the purchases.

The write-down eliminates all the $1.4 billion in goodwill AMR had as of June 30, Becker said.

The write-down "has no impact on the operation of the company," said J.P. Morgan Securities Inc. analyst Jamie Baker, who has an "underweight" rating on AMR's stock.

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