American Airlines’ parent files for bankruptcy

Saddled with an aging fleet of aircraft and high labor costs, the parent company of American Airlines filed for bankruptcy Tuesday, seeking protection from creditors while it restructures its operations.

The airline said that operations would continue, that all flights would depart on schedule and that frequent-flier miles would be honored. Washington’s three regional airports reported that American flights were operating on a normal schedule Tuesday.

“People need not worry about their tickets or their frequent-flier miles,” said an industry individual familiar with airline bankruptcies.

American and its regional carrier, American Eagle, have 50 daily departures from Reagan National Airport, 13 from Baltimore-Washington International Marshall Airport and 10 from Dulles International Airport.

American’s parent company, AMR, has incurred $12 billion in losses since 2001, and analysts say it is on track to lose $1.1 billion more this year.

“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,” said AMR chief executive Thomas W. Horton.

With industry profits of less than 1 percent forecast for 2012, American had little hope of a significant rebound in the coming months.

The airline industry has lost more than $20 billion worldwide during the past decade.

“The high price of oil and an anemic economic outlook are the biggest issues,” Tony Tyler, head of the International Air Transport Association, said in providing an industry overview before American’s filing. “Air cargo demand, which had been flat for more than a year, is now definitely declining. Passenger traffic has been unexpectedly resilient, but it is difficult to imagine that trend continuing in the face of rising economic uncertainty and stubborn unemployment levels.”

Sign of consolidation?

AMR sought bankruptcy court protection so that it could restructure its labor costs, airport agreements and airplane leases to bring them in line with the rest of the major carriers. United, Northwest, U.S. Airways andDelta airlines used bankruptcy as a means to reduce their costs.

The bankruptcy could signal further consolidation of an industry that already has been contracted by recent mergers between United and Continental and Northwest and Delta.

“American becomes an attractive merger candidate once they go through the carwash of bankruptcy,” industry analyst Vaughn Cordle said.

Cordle said U.S. Airways would be a likely suitor, eager to stay competitive with the mega-airlines formed by United-Continental and Delta-Northwest. If U.S. Airways did merge with American after the bankruptcy, three domestic network carriers would control about 60 percent of the market, Cordle said.

The merger this year of Southwest Airlines and AirTran Airways brings to six the number of low-cost airlines, who hold a 28 percent market share.

“The upshot is that the industry has to get smaller,” Cordle said.

A smaller industry would increase profitability for all airlines because they could more easily pass fuel increases and regulatory fees to passengers in a less competitive market.

Although Horton said American “may trim the schedule a bit, but it will be modest,” Cordle said that if fuel costs stay high, the airline may need to cut service.

“I can only assume they’re going to have to do something to stem the gushing red ink, and that’s going to be to pull down some capacity,” Cordle said.

Though Horton said it was not the final straw, negotiations with pilots and workers over cost-cutting contracts were not making progress. The unions are seeking to regain some of the $1.6 billion in concessions they made to save the company from bankruptcy in 2003. The company’s labor expenses were reported to be about $800 million a year more than those of its competitors.

American has $16 billion in health and pension obligations to employees and retirees, and $5.5 billion of that amount is unfunded.

“Labor is going to be the largest unsecured creditor at the table,” Cordle said.

‘Change is never easy’

Horton took the reins of AMR on Monday, elevated by the board after his predecessor, Gerard Arpey, opted to retirerather than lead the company through the bankruptcy.

In a written message to AMR employees, Horton said that “we expect to continue to provide employee wages, health-care coverage, vacation, and other benefits, without interruption.”

He wrote, “I realize this news might be difficult to absorb. Change is never easy.”

Replacement of the airline’s fleet, the oldest among major carriers, will continue as planned, Horton said.

The airline recently placed record-setting orders with Boeing and Airbus for 460 planes in a deal worth more than $38 billion.

Boeing spokesman Tim Neale said the company expected to fill the American order.

“Having new, fuel-efficient airplanes going forward is very important to their future,” Neale said. “That’s part of getting their costs in order. We have seen a number of our customers go through bankruptcy and emerge to continue operations.”

AMR said it has about $4.1 billion in unrestricted cash and short-term investments. That money, with cash generated from operations, will more than pay debts owed vendors, suppliers and business partners while the bankruptcy proceeds, the company said.

Ashley Halsey reports on national and local transportation.
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