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

Two AA planes passing each other

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.

7 thoughts on “American Airlines Files for Ch 11 Bankruptcy – No Effect on Passengers”

  1. Contrary to their ‘business as usual’ message, AA has cancelled two flight on me today and the line at La Guardia for reticketing is over 1 hour long – my agent says she’s on forever hold with them as well.

    At least I’m not headed to Heathrow…

    J W – Sent via BlackBerry

  2. I received an email from AA about this and saw in their second paragraph that “The miles you’ve earned are YOURS and will stay YOURS…” Does this mean that I own them? Must I read some ‘fine print’ somewhere to discover that they are NOT mine? Hmmm……

    I am a lifetime Platinum but perhaps that means little.

    J K

    1. David Rowell – Seattle, WA, USA – New Zealander now living in the United States.

      Hi, John

      I don’t think you need to read very far at all to see the fine print.

      The actual sentence in their email says

      The AAdvantage miles that you’ve earned are yours and will stay yours, subject to usual policies, [my emphasis] until you choose to redeem them for a great award with us.

      In other words, they are not really yours at all, same as normal. :)

  3. Hi David,

    I think the reason that AA held out so long on filing for Chapter 11 goes back to 2003. The company stressed that it could get through the myriad of troubles without a bankruptcy filing, if the employees would agree to concessions. To get concessions, only to go through bankruptcy later would present a host of problems and a major loss of credibility, both with employees and investors.

    One can argue at what point in time AA passed the time in which a bankruptcy filing first became prudent, but it’s done.

    As for “dismissing” Arpey and promoting Horton, I think it’s more P.R. than anything. Arpey had lost credibility with the employees and Wall Street. Horton still has some. I rather doubt that Horton will still be in charge, when AA exits. Glen Tilton defied the odds, when he was still CEO of United upon exit from Chapter 11. Generally, it’s very rare for the CEO who is in charge at filing to be around at exit, even if there is an immediate change at the filing.

    Frankly, for AA to get a quick trip through bankruptcy may require AMR to find a new CEO and management team. They may try to hire someone from another carrier. I would seriously consider someone from either a hotel chain or cruise line, since both sectors seem to understand the concept of being nice to guests far better than the airlines do (with the possible exceptions of Southwest, Jet Blue, and Virgin America).

    The culture at AA was created by Bob Crandall, and his successors, Carty, Arpey, and Horton, all started at AMR/AA during Crandall’s tenure as CEO. I think it’s time for a culture change, and that probably means an outsider.

    As for costs, AA’s problem isn’t that it pays it employees too much. It’s really a problem of too many old employees. A Southwest captain makes the same pay as an AA 777 captain, assuming the same seniority.

    But, the most junior captain at Southwest was hired in 2001. The most junior captain at AA was hired in 1991. My friend who flies for AA maxed out his pay as a 757/767 F/O in 2003, but he didn’t move up to captain until 2008.

    What AA needs to do is something that companies in all sectors have done. Offer early retirement packages to get very senior employees in all work groups to retire. Then, AA can hire new employees at the bottom of the pay scales. Even with some decent increases in wage rates, AA could still save a significant amount of money.

    Obviously, AA still has pensions, and it’s workforce isn’t as productive as workforces at other carriers. But AA could certainly negotiate closing pensions to new hires, working more hours each month, and the like in exchange for wage increases and early retirement packages.



    1. Finally an interesting response. Thank you Kent. I was under the impression that pilots at AA were leaving in droves, at a much higher rate than planned. This has caused AA to pull doen their schedule by as much as 3% for 2012 to address pilot shortages. It appears that the Chapter 11 threat encouraged enough pilots to leave. I doubt a buyout would be that successful within the pilot groups. Same would apply to Flight Attendants. Schedules are awarded to the most senior flight attendants, giving those at the top of the heap the greatest schedule flexibility.

  4. David,

    For some reason, airlines, unlike railroads, typically remain under the management of the existing management (debtor-in-possession). This means (as you point out) that the incompetents who led the company into bankruptcy are permitted to continue to run them during reorganization.

    Under railroad reorganizations, the Bankruptcy Court appoints an outside Trustee who is tasked with reorganizing, or liquidating, the railroad.

    The Trustee retains the senior management he wants to retain and has CEO powers to hire and fire. All of his activities are under the purview of the Bankruptcy judge. This procedure is dictates under some specific legislation–I’ve forgotten the Act.

    I have never understood why the Bankruptcy Courts didn’t follow this practice in all major bankruptcies. Of course, it is possible to end up with an incompetent trustee but with the various stakeholder committees, the bankruptcy judge will soon hear about the incompetency.


  5. I would imagine that filing for Chapter 11 will strengthen AA’s position in negotiating with the APA, TWU and APFA unions, all of which are currently in negotiation. AA and the APA have been in negotiations for 62 months, AA and all TWU groups for a maximum of 42 months and with the APFA for 41 months.

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