FAA Pops On AMR Bankruptcy

American Airlines filed for bankruptcy protection today and shares of AMR, its parent company, took a nose dive, plummeting 84% to 26 cents, as it too declared bankruptcy.

The third-largest airline, in terms of traffic, whined that it couldn’t compete with the other big U.S. airlines, because they had all cut costs by declaring bankruptcy at least once during the last decade, while American had not.

However, the entire airline industry has been funk due to higher fuel prices and an lagging economy that leaves many consumers taking fewer flights. The industry’s troubles can be seen in the 40% decline in the Guggenheim Airline ETF (FAA).  Not that this should be any surprise. A year ago, I basically declared the industry had peaked in my story Flying High With Airline Stocks.

Surprisingly, the ETF jumped 22 cents to $25.25 on Tuesday because other airline stocks popped. It appears American’s woes could be a boon for the rest of the industry as they take over some of its routes. This move is a good example of why ETFs are better investments than single stocks. Not only did the ETF’s diversified portfolio protect it against AMR’s troubles, but by holding the entire industry, the ETF registered a gain.

Zacks says the ETF is worth watching as the bankruptcy plays out and the competitors move in on its hubs. But I think you should just stay away. Oil prices will continue to hurt airline income statements. Not to mention the potential fallout from the European debt crisis.

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