Article: An Airline Stock to Avoid

The next “Fool Revisited” piece this week is a companion piece to this one written on American Airlines. Whereas that article was hopeful for the company in advance of earnings, this article actually reported on those less than stellar earnings, which were really the beginning of the end for the last major American airline to declare bankruptcy – at least in that go around.

I’ll let you go read the article for all the details, but it was a pretty painful existence for the company leading up to its bankruptcy. As I’m sure I’ll cover in a future article or two, American Airlines’ fall from grace was not sudden, and they probably would have been better served joining the likes of Delta Airlines and United Airlines in bankruptcy years prior, but they were just too stubborn to do so. But when 14 of 16 quarters are showing a loss, it was definitely time to pack it in, and the airline finally declared Chapter 11 bankruptcy a month later, despite a rosy outlook (that probably wasn’t entirely warranted) at the time of its earnings announcement.

As an investor, the hope is to always identify companies that will continue to do what they well for an extended period of time. Many investors to the very end saw high revenues at American, with ticket sales and plane purchases hiding a lot of the problems that were actually affecting the performance of the business. This is why it’s important to look beyond those big headline numbers – “WIDGETS, INC. POSTS ELEVENTY BILLION IN REVENUE THIS QUARTER” – and look at the entire picture. Because often buried under those big headlines are the things that actually matter – “Widgets, Inc. just lost a huge lawsuit that will have a material effect on their business going forward and we will probably be going out of business within a year but REMEMBER THOSE ELEVENTY BILLIONS IN REVENUE!!!” Luckily, the market has become better at parsing this stuff out, but if you want to be an informed investor, you need to find these things out on your own.

Until next time…

Disclaimer: I do not own currently own shares in any of the mentioned companies, and I have no plans to purchase shares of either company within the next 60 days in any account in which I manage investment funds. You can read a little about my personal investment philosophy here.