American Airlines Cancellations Results in Loss and Profit

The major U.S. carrier canceled over 3,000 flights this week, displacing several hundred thousand passengers. Passengers are fuming, and the FAA is under fire. AMR stock reached an all-time low market price of $1.15 per share. Will they recover or is bankruptcy in their future?

American Airlines has already been trying to sell off its regional carrier, American Eagle. Now overdue FAA inspections force the airline to ground the entire flight of MD-80s until re-approved for flight. At least the airline is not taking the fall alone. The FAA has faced heavy fire from Congress for this move. Senators say the FAA had ample time to complete the inspections on schedule, claiming that this week's cancellations came as a result of the agency's negligence. Still, placing the blame aside, the repercussions of this action could leave the airline in a permanent state of damage control.

The loss of revenue from cancellations of this magnitude would be enough to sink even the largest carrier. When flights don't operate, airlines don't make money. To go even further, it costs them an arm and a leg to appease disgruntled passengers. This consists of issuing ticket, meal, and hotel vouchers, transferring passengers to other airlines, refunding tickets, and delivering the piles of misplaced baggage that chaos like this always results in. Ticket vouchers will be issued up to $500 per passenger, meal vouchers up to $20, and hotel vouchers if they are lucky enough to find a room. When an airline transfers passengers to another carrier, they pay full fare for those seats, no matter what the passengers originally paid. Delivering luggage will cost about $50 per piece. Also, you have to account for the massive overtime logged by American Airlines employees this week. All in all, this week will prove very costly for the airline.

Of course, we can't forget that another's misery can always be profitable. Midweek AMR stock dropped to $1.15 per share, just narrowly missing the junk yard. This occurred amidst the height of the panic at the airline's cancellation notice. For the daredevils among us, this would have been a very opportune time to buy. After the panic died down, the stock quickly rebounded to over $9 per share, where it remained through the end of the week. There was a lot of money to be made for those who were quick to strike.

Not by coincidence, Amtrak has reported a large increase in passengers this week. With the loads of travelers struggling to get to their destinations, trains have become a viable plan B. I'm sure Amtrak couldn't be happier. As far as alternative transportation, it goes without saying that rental car companies and Greyhound have also seen a spike in revenue this week. This is just another example of how profit goes hand in hand with loss.