Bloomberg News

AMR Can Reject Some Engine, Aircraft Leases, Judge Rules

December 29, 2011

(Updates with ‘war chest’ in third paragraph.)

Dec. 22 (Bloomberg) -- AMR Corp., the bankrupt parent of American Airlines, won permission to reject some of its leases on about 900 aircraft as it reorganizes with a more competitive fleet.

U.S. Bankruptcy Judge Sean Lane in Manhattan court today granted the third-largest U.S. airline company’s request to end contracts including those for engines and related equipment after AMR made changes in its plan to resolve objections by City National Bank, U.S. Bank National Association and AWAS Aviation Services Inc. AMR didn’t say how much money was involved.

AMR has built a “war chest” of about $4.8 billion in cash and investments in preparation for the bankruptcy filing, a lawyer for the U.S. Trustee, which oversees bankruptcies, said at the hearing. Some investments don’t comply with rules, he said.

Lane, saying he recognized the airline needed lots of cash to run its business, deferred final permission for AMR to continue its current cash and investment practices, saying he wanted more information from AMR on the risks of its investments and how much it would cost to bring them into compliance.

Separately, Lane said he received a letter asking him to form an equity committee for AMR shareholders, which he passed on to the U.S. Trustee’s office for consideration.

‘Bushwhacked’

Harvey Miller, a lawyer for AMR, complained to Lane that the creditors’ committee had “bushwhacked” the company by claiming a victory in making AMR restrain spending. He referred to a tabling of pre-filing expenses that contained a typographical error as “inflammatory.”

Miller said American is still flying during bankruptcy, bookings are high and the filing hasn’t had a material effect on its business.

According to the creditors’ data, AMR was seeking to pay $937.7 billion in expenses. It should have read $937.7 million. AMR has another $335.5 million of back wages and employee expenses to pay, according to creditors’ data.

AMR has proposed changes to its financing plans on 340 aircraft since filing for bankruptcy, according to court papers.

AMR has said it needed to reject leases, sell or abandon aircraft and engines in order to renew its fleet and be more competitive with rivals that earlier restructured their costs and debts in Chapter 11. A downturn in the economy has made several leases uneconomical, and some equipment already taken out of service is “languishing in expensive storage space without generating any value,” lawyers for the company wrote.

Appropriate Steps

U.S. Bank National, involved in contracts for 12 of the aircraft, had objected that AMR failed to give it the benefit of a reasonable process for the surrender of the airplanes, or a reasonable timeframe.

AMR’s official creditors’ committee, which includes Boeing Co.., representatives from its unions and bondholders, has said it intends to work consensually with the company as it restructures. Creditors also said in court papers that the company’s first-day requests were unusual “in that substantially all of the relief being sought was on an unlimited basis and without any material review or oversight of the Committee,” and noted that AMR entered chapter 11 reorganization with fewer scheduled passengers carried and a smaller fleet than either Delta-Northwest and United- Continental.

Unions for the carrier’s pilots, flight attendants and mechanics joined the committee after failing to reach new contract agreements with American in negotiations that began as far back as 2006. American parent AMR Corp. singled out industry-leading labor costs as one reason for its Nov. 29 bankruptcy filing.

The airline, which was headed for a fourth straight yearly loss, has said it has $800 million more in annual labor costs than peers.

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

--Editors: John Pickering

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Tiffany Kary in New York at tkary@bloomberg.net.

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


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