“Let me mention airlines because again they’re up. Actually, we saw Delta earlier in the they raise their guidance a little bit. They had lower fuel cost, a little bit better revenue. AMR had a $2.9 billion raise. That’s excellent. Look at these prices here for the airlines so far this month. We’ve had great moves to the upside here. Yes, they’re selling their frequent to Citi group. They could sell frequent flier that’s going to help them repair their balance sheet.” – CNBC’s Squawk on the Street 9/17/2009

Major concerns over the balance sheet of the world’s second largest airline were eased today on the news that AMR Corp (AMR) raised nearly $3 billion in funding.  About $1 billion of the funding came from selling frequent flier miles to its credit card partner Citigroup (C) to be used as incentives for cardholders.  Many other airlines have used these presale miles sales as a source of funding in these tough times.  Another $1.6 billion came from GE Aviation (GE) in the form of aircraft financing.  The company will retool its routes around its hubs in order to take advantage of its most profitable flights, and they will be increasing capacity by 2.5% on international flights.  The parent company of American Airlines stock is surging today on the news, up more than 20% in morning trading.

AMR The move will help American Airlines weather what is expected to be a tough winter for airlines and other industries related to travel.  Travel usually slows down after the summer season, and just a few days ago an industry group revised estimates that the airlines will lose $11 billion for the year.  That estimate was $2 billion worse than the previous estimates.  Meanwhile, airline stocks seem unaffected and actually are soaring recently, lead by AMR up nearly 70% this month and many others up over 50%.

Despite the dire prognosis for the industry, AMR is starting to make some bullish moves on future travel demand.  Furthermore, this additional funding will allow them the breathing room to make necessary improvements to current operations; such as replacing some of their fleet with the more fuel efficient Boeing (BA) 737 in the next few years.  It may be worth noting that there is also an outside chance that this move is a precursor to making a bid for a stake in Japan Airlines.

As for Ockham, we are maintaining our Fairly Valued rating on AMR after its 70% run up over the last month.  Clearly, airline stocks were oversold coming into the rally, and thus should have decent appreciation potential.  However, we are surprised by the extent of the appreciation in airline stocks, even after the troubling trends in demand for travel and projected industry losses.  While this balance sheet strengthening action does help the competitive position of AMR, we are steering clear of airlines in this environment.  They may be on the mend, but profitability is a major concern and we are worried that consumers will continue to be frugal when it comes to travel spending for the next few years.

AMR Boosts Liquidity and Its Stock Takes Flight