American Airlines filed for bankruptcy protection on Tuesday to cut labor costs in the face of high fuel prices and dampened travel demand, capping a prolonged descent for what was once the largest U.S. carrier.
AA’s parent company AMR has suffered losses of more than $10bn (£6.4bn) since 2001 and was the last of the leading US carriers to file for bankruptcy.
The company, which employs about 88,000, has been mired for years in fruitless union negotiations, complaining that it shoulders higher labor costs than rival domestic and foreign carriers that have already restructured in bankruptcy.
“They have spent four or five years trying to renegotiate with the unions and they haven’t been very successful,” said Airline industry analyst Denny Kelly of Kelly James Associates. “I think they had little choice here.” Kelly calculates that AMR’s wage bill is about $600m a year higher than its closest rivals.
“The world changed around us,” incoming Chief Executive Tom Horton told reporters on a conference call. “It became increasingly clear that the cost gap between us and our competitors was untenable.”
American was unique among “legacy” airlines in the US (major carriers around since the industry was deregulated in 1978) in not having declared bankruptcy. Delta, United and US Airways all filed for Chapter 11 in the last decade.
In fact, US Airways, Delta and Continental have all been through it twice. Vasigh calls Chapter 11 “very regular in the airline industry.”
“Just as with the company’s major airline competitors in recent years, the Chapter 11 process enables American Airlines and American Eagle to continue conducting normal business operations while they restructure their debt, costs and other obligations,” the company said.
“American Airlines and American Eagle are operating normal flight schedules today,” said the airline in a statement. Reservations, customer service and “all other operations are conducting business as usual.”
Bankruptcy gives AMR a chance to pare less profitable operations, and could result in the sale of flight routes. The process also gives AMR more flexibility, according to Jack Williams, a 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,” Williams said.
“The announcement of the bankruptcy wasn’t really surprising,” concurs Jun Li, who studies the airline industry as a doctoral candidate in the Department of Operations and Information Management at the Wharton School of the University of Pennsylvania.
“Mergers of other airlines [particularly Delta with Northwest and United with Continental] put American Airlines in a much worse situation than before,” he said.
Robert Herbst, an analyst with AirlineFinancials.com and a former American pilot, said there was a “95 percent” chance American would join up with another carrier within two years.
“US Airways is probably toward the top of the list but it wouldn’t be the only (potential merger partner),” he said.
AMR named Thomas Horton as chairman and chief executive; Arpey will retire. “This was a difficult decision, but it is the necessary and right path for us to take – and take now – to become a more efficient, financially stronger, and competitive airline,” Horton said.
Shares of AMR closed Tuesday down $1.36, or 84 percent, at 26 cents, down from a 52-week high of $8.89 on January 7. Stock typically is wiped out in bankruptcy.
Shares of rival airlines rallied on expectations that reduced competition could boost fares. AMR had kept a lid on industrywide fares in its effort to keep its airplanes full.