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Are AMR Shares Headed Up?
By Ted Reed 05/11/10 - 06:00 AM EDT

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Stock quotes in this article: AMR , CAL , DAL

DALLAS TheStreet) -- Maybe American(AMR) is not quite so impaired as it seemed to be three weeks ago.

* More on AMR
* Feds Make Unionization Easier at Airlines
* Southwest's Low Debt Makes It Top Airline Bet
* Cheap Flights Vanish as Airlines Merge

* Market Activity
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Continental Airlines Incorporated| CAL
UP
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Delta Air Lines Incorporated| DAL
UP
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AMR Corporation| AMR
UP

The carrier's image may have been tarnished by a strikingly large first-quarter loss of $505 million (including items) and by the acrimonious earnings conference call that followed, but a series of tentative contract agreements with its biggest union last week showed American in a different light: As a methodical problem solver.
American Airlines

The three tentative agreements with the Transport Workers Union, including one with the 11,500-member mechanics bargaining unit, came last week and would cover about half of the TWU members at American. These are deals American needs as it continues talks with unions that have been more recalcitrant.

While unsurprising in that American and the TWU have long had a positive relationship, the deals -- if they are ratified by members, some of whom have criticized union leadership -- could serve to alter the momentum in a labor climate that has been harsh for several years, during which American's unions have railed against a series of executive benefits approved after labor made concessions valued at about $2 billion in 2003. The labor concessions enabled the carrier to avoid bankruptcy.

In a recent report titled "Turbulence Begets Opportunity," J.P. Morgan analyst Jamie Baker recently recommended American shares, saying: "For investors who can stomach greater volatility, AMR's lagging YTD performance suggests that should management better execute, meaningful relative outperformance may potentially occur."

Subsequently, on Friday morning, Baker wrote that American shares, as well as Continental(CAL) shares, had fallen 30% in 28 trading days, triggering his recognition that historically, for both stocks, "short-term corrections of this magnitude have consistently been followed by equity upside over the next 180 trading days." The shares, priced at $6.75 on Friday morning, closed Monday at $6.97.

Also on Friday, Morgan Stanley analyst William Greene wrote that "the legacy laggards are the most compelling way to play summer demand" and dubbed American and Delta(DAL) his top picks. "Recent market risk aversion has driven a selloff in airline stocks, despite improving fundamentals," he wrote. "This volatility is an opportunity for investors."