AMR Corporation (AMR), the parent company of American Airlines, filed for bankruptcy today, finally giving in to rising fuel costs and dampening travel demand. American, the last major air carrier to file and the first since 2005, was unable to continue competing in a climate where other airlines had shed labor costs by filing for bankruptcy.
Airline Stock Plummets
Shares of AMR cratered on the news, gapping down nearly 80 percent to begin trading on Tuesday. The Fort Worth, TX-based company also announced a change at CEO, naming 22-year company veteran and former President Thomas Horton to the top spot to replace the exiting Gerard Arpey, who had spent over 30 years at American. The bankruptcy most likely means that jobs will be cut and Horton said that the company would "modestly" cut its flight schedule during the reorganization. It all comes as part of American's efforts to change their business model and reduce expenses. American has been hit hard by increased costs, with the cost of jet fuel jumping 60 percent in the last five years, and the company lost $162 million in the third quarter. The filing revealed American had $29.6 billion in debt to $24.7 billion in assets, including $4.1 billion in cash.
“It became increasingly clear that the cost gap between us and our biggest competitors was untenable,” Horton said. “The economic climate has been most uncertain, oil prices remain high and volatile, and all of that taken together led to the conclusion that now is the right time to take this step and put the company back on the path to long-term success.”
Final Domino to Fall
American Airlines was the last remaining major airline in the United States that had not filed for bankruptcy, and that proved to be precisely what prevented American from remaining competitive. Delta Air Lines (DAL) filed in 2005, United Airlines and US Airways (LCC) filed in 2002, and Continental in 1983 and 1990. The bankruptcies, combined with the merger of United and Continental last year to form United Continental Holdings Inc. (UAL), meant that American was faced with increased competition from airlines that weren't still carrying the massive labor costs that American was unable to shed. “Airlines like Delta and United who have gone through recent mergers have come out stronger in the long run in an extremely tough economic situation,” said Rick Seaney, CEO of Dallas-based FareCompare.com. “This is probably a good thing for American in the long term.”
Pensions at Risk, Future Murky
The chapter 11 filing is particularly painful for the employees of American who agreed to a 30 percent pay cut in 2003 to help the company avoid going into bankruptcy. However, the situation might require that the company still push forward in reducing pensions and trimming some of the 78,000 employees on American's payroll. "Labor is going to take a major hit," said Darryl Jenkins, a consultant who has done work for major airlines. "Their pensions are in danger." Executives at the company reiterated this stance, with CFO Isabella Goren stating that “AMR cannot continue to progress towards a viable and stable future without further, significant remediation of its uncompetitive cost structure.”
Still others seem to believe that the bankruptcy will lead to a merger or buy out in the end. Ray Neidl, an analyst with Maxim Group LLC, has speculated that American could be pushed into a merger with US Airways, speculation further fueled by the fact that US Airways CEO Doug Parker has been a strong proponent of consolidation since 2005 when he successfully managed to organize the take-over of US Airways by his own America West Airlines. Horton, though, tried to express optimism for the future, saying “The most important message of the day is that it will be business as usual while we focus on doing a great job for our customers. All of the people of American Airlines are going to stand tall and deliver for our customers.”
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