November 29, 2011
American Airlines and its parent company AMR filed for bankruptcy on Tuesday to cut costs and combat soaring fuel prices and dampened travel demand.
American Airlines was once the largest US carrier, but is now third behind United Airlines and Delta Air Lines. It had been the only major US airline to avoid a bankruptcy filing in the last decade and consequently has the industry's highest labour costs.
The airline hopes bankruptcy will cut labour costs after it failed to reach a deal with pilots and other work groups after years of fruitless negotiations. Analysts question, however, whether restructuring under Chapter 11 of US Bankruptcy Code will address operational shortcomings and bolster revenue.
The filing also leaves AMR vulnerable to unsolicited takeover bids by rival airlines in the rapidly shrinking airline industry.
"It completes the cycle," said Helane Becker, an analyst with Dahlman Rose. "Every major airline in the United States has filed for Chapter 11."
AMR's move comes on concerns of weaker travel demand, leading airlines to cut back service.
In its bankruptcy filing, AMR said its cost-cutting in recent years had been insufficient and that it could not continue without changing its "uncompetitive cost structure."
"Without addressing the realities of the marketplace, AMR cannot be competitive with its peers," it said.
Shares of AMR, whose passenger planes average 3,000 daily US departures, have tumbled 45 percent since the end of September. Stock in bankrupt companies typically is wiped out when a company exits Chapter 11 and new shares are issued, making the old shares worthless.
Last week the AMR shares hit their lowest level since 2003, when AMR skirted bankruptcy by winning wage concessions from its unions.
Shares of rival airlines rallied in early trade on expectations that fares industry wide could rally if American Airlines sheds some of its cost burdens. Experts said the carrier has kept fares low and spoiled industry-wide fare increases as it struggled to keep its planes full.
Shares of United Continental, US Airways and Delta Air Lines all rose.
AMR said last month it was also suffering from high fuel prices that sent its costs up 40 percent in the third quarter compared with a year earlier.
International Airlines Group expects its transatlantic joint venture with AMR to continue as normal during the proceedings.
AMR named Thomas Horton as chairman and chief executive on Tuesday, replacing Gerard Arpey, who retired.
Under its Chapter 11 bankruptcy filing in a New York court, the company listed assets of USD$24.72 billion and liabilities of USD$29.55 billion. The company has USD$4.1 billion in cash.
AMR said both American Airlines and its regional carrier American Eagle were expected to fly normal schedules throughout the Chapter 11 process.
"We plan to initiate further negotiations with all of our unions to reduce our labour costs to competitive levels," Horton said.
The union representing AMR's pilots called the bankruptcy filing a "solemn occasion."
"While today's news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way," David Bates, president of the Allied Pilots Association, said in a statement.
"The 18-month timeline allotted for restructuring will almost certainly involve significant changes to the airline's business plan and to our contract," he said.
The bankruptcy proceedings will give AMR more tools in its long-running effort to restructure its operations and balance sheet, according to Jack Williams, professor of law at Georgia State University.
"There are considerable tax benefits that they will be able to use in a bankruptcy case and they will be able to more aggressively manage their liabilities."
Bankruptcy also allows the company to force creditors to agree on a plan to reorganise the company, and it also gives AMR the chance to sell flight routes through the bankruptcy sales process.
But Tuesday's filing with AMR showed few details about how the company would proceed, said Stephen Selbst, a bankruptcy attorney with Herrick, Feinstein in New York.
"What it suggests is they haven't settled on a strategy or they would have been more up front. It's possible they are still in negotiations and don't want to put something on paper that might prejudice those negotiations," he said.
Still, Dahlman's Becker said the bankruptcy proceedings would not solve AMR's problems and that the airline needed to rework its operations and boost revenue.
"Bankruptcy is not necessarily the be-all, end-all," she said. "They've got more problems to address in addition to the cost problem."
AMR's major rivals, UAL and Delta, used bankruptcy protection to cut costs and have since bought out other airlines: Delta bought Northwest Airlines and UAL bought Continental Airlines to form United Continental.
US Airways and United Airlines sought relief under Chapter 11 bankruptcy in 2002. Delta and Northwest filed in September 2005.
AMR has been in talks with its pilots for five years, and a wave of pilot retirements in October prompted speculation the airline was nearing a bankruptcy filing.
Some industry watchers believed the pilots chose to retire to lock in pension values that may be in jeopardy as the company moves through bankruptcy court.
AMR said the bankruptcy has no direct legal impact on operations outside the United States. It also said it was not considering debtor-in-possession financing.