The last major US airline files for bankruptcy

NEW YORK | It used to be the world’s largest airline, a ‘dream of stars and stripes,’ the only big carrier that had succeded to avoid bankrupt.

Yet now it has gone broke.

American Airlines and its parent company AMR on Tuesday filed for Chapter 11 bankruptcy protection in New York, in an effort to cut labor costs, airport agreements and airplane leases to bring them in line with the rest of the major carriers. Its shares plunged 85% to 23 cents a share.

The Texas-based airline has suffered $12 billion in losses since 2001 because of a 40 percent jump in fuel expense, inefficient aircraft and higher labor costs than its rivals. It still needs to fund worker pensions, which other major carriers do not, and is on track to lose $1.1 billion more this year, according to The Washington Post.

“We must address our cost structure, including labor costs, to enable us to secure our future”, said incoming Chairman and CEO of AMR and American Airlines Thomas W. Horton.

Too late?

Analysts quoted by The New York Times pointed out that the company’s reluctance to seek protection earlier had left it less nimble than many of its competitors like Delta, United, Continental and US Airways, which have all gone through Chapter 11.

…Or may be too early?

Other experts wonder why filing for chapter 11 bankruptcy arrives now even though AMR has $4 billion in cash.

“AMR’s $4.1 billion cushion of unrestricted cash suggested it had more time. A rule of thumb is that an airline needs cash equivalent to about 10% of annual revenue to keep going, or about $2.4 billion in AMR’s case. AMR’s decision to file now, therefore, looks like a defensive move”, writes Liam Denning at The Wall Street Journal.

In a letter distributed to AMR staff on Tuesday, Horton said (extract from The Washington Post):

“I realize this news might be difficult to absorb; change is never easy. We will do our very best to keep you informed, understanding that there will be many questions we are not able to answer right away. I can certainly tell you that we expect to continue to provide employee wages, healthcare coverage, vacation, and other benefits, without interruption.”

But since AMR seeks to cut expenses and leave bankruptcy in less than 15 months, job and flight reductions are likely in the future. As for the impact on the 240,000 passengers who fly American Airlines each day, the filing should have little noticeable effect on them. The real risk is if the restructuring fails.