AMR Corp., parent of No. 1 U.S. carrier American Airlines, said it will raise about $503.1 million from a new share issue, shoring up its balance sheet while diluting earnings.
The resulting dilution to earnings sent AMR shares, which hit their highest level in six years last week, tumbling lower.
AMR will issue 13 million new shares -- about 5% of its diluted share count at the end of 2006 -- at a price of $38.70 a share. The issue could grow by 1.95 million new shares, if underwriters need to cover overallotments.
"The main reason we have had a hold rating on these shares has been our concern that American would issue equity when it had the chance to do so to help repair its balance sheet," said Helane Becker, an analyst with Benchmark Co.
The company said proceeds from the new shares, which are expected to be issued on Jan. 26, could be used to repay debt, fund employee pensions, or buy planes.
Reducing debt is likely the priority. AMR ended 2006, its first profitable year since 2000, with $13.6 billion in net debt.
But the world's largest airline, which last week said it plans to reduce capacity by 1% in 2007, also faces pressure to replace its inefficient MD-80s.
"It's a competitive disadvantage, but oil has dropped and that's taken a little bit of the pressure off," said Jim Corridore, an equities analyst with Standard & Poor's. "But they do need to address that sooner rather than later."
American has 300 MD-80s, or close to half of its fleet of 672 aircraft.
The airline has a special relationship with Boeing, as its largest customer historically, and could quickly gain access to new planes.