Bloomberg News

American Airlines Parent AMR Files for Bankruptcy Protection (4)

November 29, 2011

(Updates with Horton comment in eighth paragraph.)

Nov. 29 (Bloomberg) -- American Airlines parent AMR Corp. filed for bankruptcy after failing to secure cost-cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S.

With the filing, American became the last of the so-called U.S. legacy airlines to seek court protection from creditors. The Fort Worth, Texas-based company, which traces its roots to 1920s air-mail operations in the Midwest, listed $24.7 billion in assets and $29.6 billion in debt in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan.

“It’s painful but probably necessary,” John Strickland, an aviation analyst at JLS Consulting in London, said today in a telephone interview. “They will have to go through the whole process that their peers have gone through.”

Job and flight reductions are likely in the future as AMR seeks to trim expenses, Chairman and Chief Executive Officer Tom Horton said today on a conference call. Normal flight schedules will continue on American and its American Eagle regional unit for now, along with the airline’s frequent-flier program, the company said. A spinoff of American Eagle, which already had been delayed from this year into 2012, is on hold, Horton said.

Horton, 50, most recently AMR’s president, replaced Gerard Arpey today as chairman and CEO. Arpey, 53, opted to retire after the board asked him to stay, Horton said. Arpey will join Emerald Creek Group LLC, a private-equity firm founded by former Continental Airlines Inc. CEO Larry Kellner, on Dec. 1, the firm said in a statement.

Unanimous Vote

The board voted unanimously last night to file for bankruptcy, Horton said. AMR was determined to avoid Chapter 11 as air travel fell and losses mounted after the 2001 terrorist attacks, even as peers used bankruptcy to shed costly pension and retiree benefit plans and restructure debt. Rival carriers later combined, giving them larger route networks that were more attractive to lucrative corporate travel customers.

“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.”

AMR plunged $1.29, or 80 percent, to 33 cents in New York Stock Exchange composite trading at 11:13 a.m. The shares earlier fell as much as 88 percent. Unlike secured creditors, shareholders typically get paid last in a bankruptcy and often receive nothing for their shares.

Cash Crisis

The stock had declined 79 percent this year before today as analysts including Philip Baggaley of Standard & Poor’s warned the company could face a cash crisis during the next 12 months without new labor agreements. AMR had $4.1 billion in unrestricted cash and short-term investments as of Nov. 25, Chief Financial Officer Isabella Goren said in an affidavit.

American was engaged in negotiations with unions for all of its major work groups as far back as 2006, seeking to boost employee productivity and erase part of what it said was an $800 million labor-cost disadvantage to other carriers.

AMR has the highest operating costs among the four surviving major U.S. network air carriers, Goren said in court papers. The company is set to post its fourth-straight annual loss this year and analysts had forecast a loss for next year as well.

“AMR cannot continue to progress towards a viable and stable future without further, significant remediation of its uncompetitive cost structure,” Goren said.

Talks Stall

American fell from its perch as the biggest airline by traffic after Delta Air Lines Inc. bought Northwest Airlines Corp. in 2008, then slid to No. 3 last year when UAL Corp.’s United Airlines and Continental Airlines Inc. merged.

All operate traditional hub-and-spoke systems, with their own regional units or partner airlines ferrying passengers to be collected at larger airports. US Airways Group Inc. is the other major carrier with that kind of route network. It ranks No. 5 in the U.S. by traffic, behind Southwest Airlines Co., the largest discounter.

American and leaders of its pilots’ union were scheduled to meet with federal mediators on Dec. 6 to provide an update on contract talks that stalled two weeks ago. The two sides hadn’t set a date to resume negotiations since Allied Pilots Association leaders declined to send a Nov. 14 contract offer to union members for a vote, saying it “clearly” would be rejected.

‘Perfect Storm’

“You would expect a leaner, stronger company to emerge from bankruptcy,” Chris Logan, an analyst at Echelon Research & Advisory LLP in London, said today by telephone. “As they are in Chapter 11, it will be more easy to demand concessions from the labor force.”

American’s pilots, flight attendants, mechanics and baggage handlers wanted to use the contract talks to regain some of the $1.6 billion in annual concessions they gave in 2003 to help the company avoid bankruptcy.

“We agreed to sacrifice based on the expectation that our airline would regain its leadership position,” David Bates, president of the Allied Pilots Association, told members in an e-mail. “What has transpired since has been nothing short of a ‘perfect storm.’”

Laura Glading, president of the Association of Professional Flight Attendants, said the filing “wasn’t a great surprise.”

“It’s a loss of jobs I worry most about,” she said in an interview. “That’s a horrible, horrible nightmare in this economy. We’ll do what we can to mitigate that as much as possible.”

AMR Employees

AMR had about 80,800 employees at the end of September, including 67,100 at American, with the rest at American Eagle, cargo operations and other units. American Airlines has 8,700 active pilots, with another 950 on furlough, and 17,000 flight attendants.

Among the company’s largest unsecured creditors listed in court papers was Wilmington Trust Corp., trustee for holders of $460 million in 6.25 percent convertible senior notes due in 2014. AMR on Sept. 27 sold $725.7 million of 10-year bonds backed by aircraft to refinance maturing debt. The company paid the highest interest rates since 2009 to raise the cash.

The 8.625 percent notes due in October 2021 fell 2.5 cents to 96 cents on the dollar as of 8:20 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Jet Order

American had blamed higher labor costs, as well as benefits that have increased more slowly than expected from business ventures with partners across the Atlantic and Pacific, partly for its failure to return to profit. The airline also has a fleet of older, less fuel-efficient planes that put it at a disadvantage when fuel prices rise.

“Airlines still face that fundamental issues of cost levels versus achievable revenues in the market place,” Strickland, the JLS analyst, said. “Higher fuel prices and the weaker U.S. economy would have given them the final push.”

American shuffled flight schedules in September 2009 to increase operations in Chicago, New York, Dallas-Fort Worth, Los Angeles and Miami to attract more high-fare business travelers.

AMR said in July it would buy 460 single-aisle jets -- 260 from Airbus SAS and 200 from Boeing Co. -- in the industry’s biggest-ever order. The orders remain “rock solid,” Horton said today.

“When we’re completed with this process, our company will be competitive and poised to grow and prosper and go out and capitalize on these aircraft orders,” he said.

‘Key Part’

Placing an order for aircraft “creates a contract,” and in bankruptcy accepting or rejecting the contract will be up to AMR, said Scott Peltz, the national leader of RSM McGladrey’s Financial Advisory Service in Chicago. Boeing and other suppliers will probably have representatives at the bankruptcy hearings who “will be looking at what their options are,” he said.

Boeing said it has “no reason to doubt” that the order for its 737s and Airbus A320s remains pivotal to AMR. The planemakers will provide $13 billion of financing on the first 230 jets, American said in July.

“We anticipate as part of American’s reorganization that new, fuel-efficient airplanes will be a key part of their ongoing success,” Mark Hooper, a spokesman for Chicago-based Boeing, said in an e-mailed statement.

International Consolidated Airlines Group SA, a U.K.-based joint venture partner with AMR that owns British Airways and Spain’s Iberia, said it has “every confidence in the future of American Airlines” and looks forward to working with Horton.

AMR’s lead bankruptcy counsel is Weil, Gotshal & Manges LLP and its financial adviser is Rothschild Inc.

Mail Pilot

American Airlines was formed from companies including Robertson Aircraft Corp. of Missouri, which employed Charles A. Lindbergh as a mail pilot, according to the carrier’s website. The companies began consolidating in 1929 and became American Airlines in 1934.

Company stock began trading in 1939, and during World War II, half of American’s planes flew for the Air Transport Command. American pioneered nonstop transcontinental service in 1953 and 20 years later was the first major airline to hire a woman pilot, according to its website.

The case is In re AMR Corp., 11-15463 U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Steve Rothwell and Christopher Scinta in London and Richard Bravo in New York. Editors: Stephen Farr, John Pickering

To contact the reporters on this story: Phil Milford in Wilmington, Delaware at pmilford@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net

To contact the editors responsible for this story: John Pickering at jpickering@bloomberg.net; Michael Hytha at mhytha@bloomberg.net


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