Why has American Airlines' stock risen since last week's crash?

Why has American Airlines' stock risen since last week's crash?

Why has American Airlines' stock risen since last week's crash?

Moneybox
Commentary about business and finance.
Nov. 21 2001 12:10 PM

Why Has American Airlines' Stock Risen Since the Crash of Flight 587?

Since the crash of American Airlines Flight 587 last week, the carrier's share price has actually risen. Pretty much no one predicted that this would happen so quickly, but perhaps it's less surprising than it sounds.

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On Friday, Nov. 9, AMR closed at $18.13. On Monday the 12th, Flight 587 crashed shortly after taking off from New York City's JFK airport, killing everyone on board. For the airline, the timing of the crash was "disastrous," noted a wire story that evening, summing up the conventional wisdom of the moment. "This is bad news for AMR any way you cut it,'' the story quoted one analyst as saying. "People are scared to fly because of terrorism as it is, and if a flight goes down because of a mechanical problem, they'll be afraid to fly with American.''

Or maybe not. AMR traded down by as much as 17 percent that day, but since then it's mostly climbed steadily and is now at about $19.50 a share.

What logic could explain an airline's share price rising in the wake of a terrible tragedy? First, some of the initial drop-off was attributable to fear that the flight was a victim of a new terrorist attack—a fear that had an instant impact on all airline stocks and on the markets generally. As it became clear that this probably wasn't the case, AMR and other shares recovered some lost ground—which makes sense—and in some cases even seemed to get a sort of "it's not terrorism!" bounce. That doesn't make a lot of sense to me, but it's a pretty typical example of very short-term market logic.

Anyway, the more important bit of context for the rise of AMR and other airline stocks in recent days is a consideration of just how low those stocks remain by traditional measures.

AMR is a good example. At yesterday's close, the airline had a market value of about $3 billion—a bit less, to pick a somewhat random example, than the value of Amazon.com. Last year American had revenue of about $20 billion. A typical ratio of stock price to sales is about 2 (meaning the price per share is twice the company's revenue per share). American's is 0.15. (Amazon's is about 1; Microsoft's is 14; Southwest Airlines' is 2.5.) AMR shares are currently trading at less than half their book value, which is a rather rare state of affairs. The point is, despite recent rises, there's still no shortage of pessimism in the stock prices of most major carriers.

Obviously I don't need to remind anyone of the post-Sept. 11 reasons for this. And even before Sept. 11, the airline business was dealing with one of its seemingly never-ending bouts of profitless turbulence. (Southwest was the big exception and continues to be judged by the markets as far healthier than its big rivals: LUV trades at significant multiples of its book value, and about 24 times earnings.) It still seems likely that the airline business is headed for a shakeout of one sort or another; what the market is trying to do is weigh the most significant news of American's recent past against its prospects in the future.