American Airlines Parent Raises $2.9 Billion In Capital For A Possible Acquisition

Shares of American Airlines Inc. parent AMR Corp. (AMR) soared as high as 23.7% in early morning trading Thursday after the company announced it raised $2.9 billion in liquidity to hunker down for the typically slow winter travel season and possibly acquire a majority stake in a Japanese airline.

The new liquidity includes $1.3 billion in cash from monetizing most of its unencumbered assets, selling aircraft and frequent-flyer miles to counter the sharp decline in airline travel and prepare for looming pension changes, The Wall Street Journal reported.

“There are signs of improvement in the revenue environment and in consumer sentiment, but the winter season is still potentially a challenging one,” Piper Jaffray & Co. Managing Director Douglas Runte told Bloomberg News. “This liquidity raising is an important move.”

The funds could potentially pave the way for the purchase of a stake in Japan Airlines Corp., The Journal said. American, which already has a codeshare agreement with Japan Airlines, will likely face a competing bid from the world’s biggest carrier, Delta Air Lines Inc. (DAL). Delta is in talks with Japan Airlines to acquire a majority stake in the struggling carrier, according to Japanese media reports.

Also included in the funding is $1.6 billion from General Electric Co. (GE) in which GE will provide funding for 84 Boeing Co. (BA) 737-800s. American will add the jets in a lease-back deal from GE that runs through 2011. The 737s will replace aging MD-80s that are 35% less fuel-efficient.

GE will also loan AMR $280 million in cash, with American putting up 10 aircraft as collateral for $225 million of that funding, and will pledge three more planes as security in October to tap the remaining $55 million. GE makes jet engines and operates the world’s second-largest aircraft leasing company; it has a central role in funding the airline sector during downturns.

“The fact that we have been able to raise the money we need, both to sustain us through this economic contraction and to invest in our future, is an important vote of confidence by the capital markets and our business partners,” American Airlines Chief Executive Officer Gerard Arpey said in a message to employees.

American will increase capacity at its hub cities of Chicago, New York, Dallas-Fort Worth and Miami, while scaling back flights at St. Louis and Raleigh-Durham. AMR expects the carrier’s overall capacity to grow by 1% next year, international capacity to grow by 2.5% and domestic capacity to remain flat. Excluding the impact of 2009 cancellations due to the swine flu and the launch of its Chicago-Beijing service, capacity is expected to remain flat in 2010.

In 2008, U.S.-based airlines cut flight capacity in response to record fuel prices as oil prices topped out at $147 a barrel in July of that year. Now, dwindling business and leisure travel are forcing carriers to lower fares and scale back more capacity.

Last month, JetBlue Airways Corp. (JBLU) quickly sold out its “All You Can Jet Pass,” which enables those who purchased a $599 ticket to fly as much as they want from Sept. 8 to Oct. 8. And Southwest Airlines Co. (LUV) in July offered a steep discount on fares, charging $30 for flights 400 miles or less, $60 for flights between 401 and 750 miles, and $90 for longer trips.

Shares in AMR were trading at $8.55 a share in afternoon trading yesterday, up 16.33%.

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