American Airlines Files for Ch 11 Bankruptcy – No Effect on Passengers

Ending a valiant – but ultimately unsuccessful – struggle over many years to avoid bankruptcy, American Airlines’ parent company AMR Corp filed for a Chapter 11 bankruptcy this morning.

This was something that was becoming increasingly obvious AA would need to do, and depending on your perspective, you could even criticize the airline for being too slow to recognize the inevitability of the move and operating with over-the-odds costs – particularly its labor costs, for too long, destroying shareholder value in the process.

All American’s major competitors have cycled through bankruptcy at least once over the last decade, leaving AA with what was an $800 million a year extra burden in terms of its labor costs compared to the other dinosaur airlines, and being the only major airline that still funds its employee pensions.

The airline had been expected to lose over $1 billion this year.  We recently reported on airline financial results for the third quarter which showed all other major carriers making profits for the quarter of up to $773 million, while American was showing a $162 million loss (which was actually one of its better quarterly results).  American has now lost money for eight of the last ten years.

Note that this bankruptcy is NOT about fuel costs, even though AA has included reference to fuel costs in its public statements.  All airlines pay very similar amounts for fuel, and a Chapter 11 filing won’t enable AA to adjust or reduce its fuel costs.

AA Truly is Bankrupt and Announces a Strange Promotion

There’s another interesting thing in AA’s filing.  They disclose assets totaling $24.7 billion and liabilities totaling $29.6 billion.  Although the airline has $4.1 billion of cash in hand (which is included in the $24.7 billion total asset figure), the simple reality is that it owes more than it is worth overall.

Add its negative net worth to its ongoing losses and projected future losses, and one wonders just how close to violating business rules that require companies not to continue business if they are in situations such the airline ended up in – a situation where there was no realistic expectation of being able to trade their way out of temporary difficulties.  Are any of the airline’s directors and corporate officers getting close to incurring personal liability for AA’s losses and the money it owes to creditors and is unlikely to ever pay?

While such issues are sometimes a threat and concern for small business owners who might be faced with a failed business owing a few hundred thousand dollars; somehow, when it is a huge public listed company and owes billions of dollars, there is no longer as much concern.

Talking about corporate officers, CEO Gerard Arpey announced at the same time his intention to ‘retire’ and the company has already appointed a new CEO, Tom Horton.

Who is Horton?  Until today he was AA’s President with responsibility for, inter alia, finance and planning.  Prior to that position in 2010, he served for four years as the airline’s EVP Finance and Planning and CFO.

In other words, the man who oversaw AA’s decline to the point that it today has a $4.9 billion negative net worth and declared bankruptcy is the man who has now been promoted to lead the airline out of the bankruptcy that occurred on his watch.

As I said immediately above, clearly different rules apply to big companies than to small ones.

What the AA Bankruptcy Means to Us as Passengers

The airline went to great pains to assure passengers that it will be ‘business as usual’ for passengers, and this is very much as we would expect, based on other airline bankruptcies in the past.

In their official bankruptcy announcement, AA says :

 … throughout the Chapter 11 process, American and American Eagle expect to continue to:

• Provide safe and reliable service;
• Fly normal schedules;
• Honor tickets and reservations, and make exchanges and refunds as usual;
• Fully maintain AAdvantage frequent flyer and other customer service programs, and ensure all AAdvantage miles and elites status earned by members remain secure and intact;
• Provide Admirals Club access and similar amenities to members and eligible customers;
• Remain an integral member of the oneworld® alliance, of which American is a founding member, and continue its codeshare partnerships;
• Provide employee wages, healthcare coverage, vacation, and other benefits, without interruption;
• Pay suppliers for goods and services received during the reorganization process.

So there’s little cause for concern for us as passengers, at least in the immediate short term.

We had earlier written about a possible AA bankruptcy back in October, and those comments remain accurate and relevant now.

Here’s a great roundup of other commentary and issues on the bankruptcy.