American Airlines allowed to resume normal operations after bankruptcy filing

By Andrea Ahles

aahles@star-telegram.com

American Airlines said it has received permission from a New York bankruptcy judge to continue with normal operations after its bankruptcy filing.

At a court hearing on Tuesday afternoon, the Fort Worth-based carrier said the judge approved a series of motions, allowing American to pay its workers, honor tickets, maintain its frequent flyer program and pay its fuel suppliers.

"The court's immediate approval of key motions ensures that customers around the world can continue to rely on American and American Eagle for safe, reliable and convenient air travel," said American's new chief executive Tom Horton in a statement on Wednesday morning.

American will get passengers to their holiday destinations this year, but the carrier will likely get smaller in 2012 as its parent company, AMR Corp., reorganizes under Chapter 11 bankruptcy.

AMR said high labor costs, rising fuel prices and billions of dollars in debt led it to file for bankruptcy protection Tuesday morning in a New York federal court. As part of the reorganization, CEO Gerard Arpey stepped down and was replaced by the company's president, Horton.

"No company ever wants to face a restructuring like this ... we spent 10 years trying to avoid this," Horton said at a news conference Tuesday. "The future on the other side of this restructuring we think is very bright."

AMR assured customers that it will continue to operate a normal flight schedule for American and American Eagle, its regional subsidiary, and honor its frequent-flier miles.

But industry analysts say that the airline will likely terminate leases on less-fuel-efficient aircraft and cut unprofitable routes starting in January. Layoffs or early retirement offers may occur early next year, analysts speculated.

"The first 60 days have an awful lot to do with labor and fleet, which is the reason why this company is in bankruptcy today and wasn't yesterday," said Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology. "The process begins of downsizing the American that we knew."

The decision to file for bankruptcy came shortly after the company failed to reach new contract agreements with its pilots union and other labor groups. Just two weeks ago, a deal appeared to be within reach as American made a comprehensive offer to the pilots. But the offer was rejected, and the pilots put off more talks.

Horton said American has a cost disadvantage compared with other legacy airlines, such as United Continental and Delta Air Lines, both of which went through Chapter 11 reorganizations in the last decade and subsequently became larger through mergers.

"If you look at our labor costs and compare it roughly to the other big legacy carriers, the difference between our contracts and theirs is about $800 million a year," Horton said.

In its bankruptcy filing, AMR said it had $24.7 billion in assets and $29.6 billion in debt. It had an initial court hearing Tuesday afternoon, and attorneys said they expect a creditors committee to be formed this week.

With $4.1 billion in cash, the company does not need to obtain debtor-in-possession financing to maintain operations in bankruptcy court. By entering bankruptcy while it has enough cash to fund operations, management has a little more control over the process. Horton said AMR hopes to move quickly and emerge from bankruptcy within 18 months. Delta's bankruptcy took about 19 months while United's took more than three years.

Employee concerns

Leaders at American's labor unions called the bankruptcy filing disappointing.

"While today's news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way," Allied Pilots Association president Captain David Bates told pilots in a message Tuesday.

Employees are concerned that American might terminate their pension plans and retirement benefits during the bankruptcy process. The airline has 88,000 workers, including 24,000 to 25,000 in North Texas who work at Dallas/Fort Worth Airport, its headquarters, its flight academy, its reservations office and its maintenance base at Alliance Airport.

The Pension Benefit Guaranty Corp., the federal agency that protects private employee pension benefits, estimated that American workers could lose $1 billion in pension benefits if the airline terminates the plans.

"Unfortunately, when the agency assumed airline plans in the past, many people's pensions were cut, in some cases dramatically," agency Director Josh Gotbaum said.

American has four plans that cover 130,000 participants. They have about $8.3 billion in assets to cover about $18.5 billion in benefits, the agency said.

Shares of AMR (ticker: AMR) closed at 26 cents on Tuesday, down almost 84 percent. Analysts expect that shareholders will be wiped out during restructuring.

Fuel and debt issues

Rising fuel costs have hurt American; it says it will pay $2 billion more for fuel this year than in 2010. Its older fleet, including more than 200 MD-80s that are 16 years old on average, is less fuel-efficient than competitors'.

The company, which had been the only major airline not to go through a bankruptcy, has lost money in eight of the last 10 years. Analysts expect it to post a $1 billion loss this year.

AMR also faces large debt payments. The company had $1.8 billion due by the end of 2012.

The net debt at the end of the third quarter was $16.9 billion.

"We are now at a point where we need to turn the page and move forward," Horton said.

In a letter to AMR employees, Arpey said the company's board asked him to stay on as CEO but that he chose to retire.

"After careful consideration, I concluded that my remaining in those roles would not be best for the company," Arpey said. "In my view, executing the Board's plan will require not only a reevaluation of every aspect of our business, but also the leadership of a new Chairman and CEO who will bring restructuring experience and a different perspective to the process."

Arpey, 53, will join Houston-based Emerald Creek Group, a private equity firm founded by former Continental Airlines CEO Larry Kellner.

American's union leaders had long criticized Arpey and the management team for receiving millions in bonuses several years after rank-and-file workers had taken pay cuts to keep the company out of bankruptcy. As executive compensation rose, American's competitive position in the industry slid.

A merger solution?

American was the largest U.S. airline in 2008 but lost that position to Delta Air Lines when it merged with Northwest Airlines in 2009. American slipped to third after United Airlines merged with Continental Airlines last year.

To help regain its competitive edge, American announced the largest plane order in aviation history, saying in July that it would buy 460 planes from Airbus and Boeing, with deliveries expected to start in 2013.

The massive order would replace most of American's domestic fleet with more-fuel-efficient aircraft. The first 230 planes were financed through the aircraft manufacturers.

Horton said the company plans to honor its contracts with Airbus and Boeing, calling them the foundation of American's restructuring plan.

But analysts don't know whether new planes, a cheaper workforce and fewer routes will be enough to return American to its industry-leading position. Some speculate that American may need to merge with another airline.

"To get on the other side, I think they're going to have to look at merging with somebody," said Vaughn Cordle, an airline consultant at AirlineForecasts.com.

The most likely candidate is US Airways, which went through bankruptcy twice in the past decade. Its CEO, Doug Parker, has indicated his preference for a merger with another legacy airline.

Some analysts say a US Airways-American merger makes sense, while others are not so sure.

At DFW Airport

American is the largest carrier at Dallas/Fort Worth Airport, operating about 85 percent of all flights. As part of a $1.9 billion project, the airport is renovating its older terminals where American operates.

"While the situation is fluid due to AMR's bankruptcy filing, operations are business as usual at DFW," airport CEO Jeff Fegan said.

At Tuesday's Tarrant County commissioners meeting, Tax Assessor-Collector Ron Wright said the county had filed tax liens against 365 American planes at DFW to protect the county as debts are discharged.

"When it's a corporation that big and there's a possibility of bankruptcy, we move to act in the taxpayers' best interest," he said. "Obviously, we hoped they would stave off bankruptcy."

Fort Worth Mayor Betsy Price said she hopes that the company's move will have a minimal effect on Fort Worth and the Metroplex.

"If there's anything we can do, we are a resource," she said. "Obviously we are confident they are going to find their way through and become very competitive again."

Staff writers Bud Kennedy, Maria Recio and Anna M. Tinsley contributed to this report.

Andrea Ahles, 817-390-7631

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