By Phil Milford and Mary Schlangenstein - Nov 29, 2011 9:07 PM GMT+0700
Nov. 29 (Bloomberg) -- Jeff Kauffman, managing director of equity research at Sterne Agee & Leach Inc., talks about the bankruptcy filing by AMR Corp., parent of American Airlines. AMR filed for Chapter 11 protection today after failing to secure cost-cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S. Kauffman speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
American Airlines parent AMR Corp. filed for bankruptcy after failing to secure cost-cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S.
With the filing, American became the final large U.S. full- fare airline to seek court protection from creditors. The Fort Worth, Texas-based company, which traces its roots to 1920s air- mail operations in the Midwest, listed $24.7 billion in assets and $29.6 billion in debt in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan.
“It’s painful but probably necessary,” John Strickland, an aviation analyst at JLS Consulting in London, said today in a telephone interview. “They will have to go through the whole process that their peers have gone through.”
Job and flight reductions are likely in the future as AMR seeks to reduce expenses, Chief Executive Officer Thomas Horton said today on a conference call. Horton, 50, most recently AMR’s president, replaced Gerard Arpey, 53, who retired. Normal flight schedules will continue on American and its American Eagle regional unit for now, along with the airline’s frequent-flier program, the company said.
The board’s vote to file for bankruptcy was unanimous, Horton said. AMR was determined to avoid Chapter 11 in the years after the 2001 terrorist attacks, as peers used bankruptcy to shed costly pension and retiree benefit plans and restructure debt. American later watched as rival carriers combined, giving them larger route networks that were more attractive to lucrative corporate travel customers.
‘Stronger Company’
“You would expect a leaner, stronger company to emerge from bankruptcy,” Chris Logan, an analyst at Echelon Research & Advisory LLP, said today by telephone. “As they are in Chapter 11, it will be more easy to demand concessions from the labor force.”
American was engaged in negotiations with unions for all of its major work groups as far back as 2006, seeking to boost employee productivity and erase part of what it said was an $800 million labor-cost disadvantage to other carriers.
The airline and leaders of its pilots’ union were scheduled to meet with federal mediators on Dec. 6 to provide an update on contract talks that stalled two weeks ago. The two sides hadn’t set a date to resume negotiations since Allied Pilots Association leaders declined to send a Nov. 14 contract offer to union members for a vote, saying it “clearly” would be rejected.
2003 Concessions
American’s pilots, flight attendants, mechanics and baggage handlers wanted to use the contract talks to regain some of the $1.6 billion in annual concessions they gave in 2003 to help the company avoid bankruptcy.
AMR shares have plunged 79 percent this year and analysts including Philip Baggaley of Standard & Poor’s have warned the company could face a cash crisis during the next 12 months without new labor agreements.
Among the company’s largest unsecured creditors listed in court papers was Wilmington Trust Corp., trustee for holders of $460 million in 6.25 percent convertible senior notes due in 2014.
The bankruptcy filing included AMR American Eagle Holding Corp., AMR’s regional airline that ferries passengers from smaller cities to hub airports. A spinoff of American Eagle is on hold, Horton said. AMR’s lead counsel is Weil, Gotshal & Manges LLP and its financial adviser is Rothschild Inc.
Bond Sale
AMR on Sept. 27 sold $725.7 million of 10-year bonds backed by aircraft to refinance maturing debt. The company paid the highest interest rates since 2009 to raise the cash.
The 8.625 percent notes due in October 2021 fell 2.5 cents to 96 cents on the dollar as of 8:20 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
American had blamed higher labor costs, as well as benefits that have increased more slowly than expected from business ventures with partners across the Atlantic and Pacific, in part for its failure to return to profit. The airline also has a fleet of older, less fuel-efficient planes that put it at a disadvantage when fuel prices rise.
“Airlines still face that fundamental issues of cost levels versus achievable revenues in the market place,” Strickland, the JLS analyst, said. “Higher fuel prices and the weaker U.S. economy would have given them the final push.”
‘Every Confidence’
International Consolidated Airlines Group SA, a U.K.-based joint venture partner with AMR that owns British Airways and Spain’s Iberia, said it has “every confidence in the future of American Airlines” and looks forward to working with Horton.
AMR said in July it would buy 460 single-aisle jets -- 260 from Airbus SAS and 200 from Boeing Co. (BA) -- in the industry’s biggest-ever order. The orders remain “rock solid,” Horton said today.
“When we’re completed with this process, our company will be competitive and poised to grow and prosper and go out and capitalize on these aircraft orders,” he said.
Boeing said it has “no reason to doubt” that the order remains pivotal to AMR.
“We anticipate as part of American’s reorganization that new, fuel-efficient airplanes will be a key part of their ongoing success,” Mark Hooper, a spokesman for the Chicago- based planemaker, said in an e-mailed statement.
Mail Pilot
American Airlines was formed from companies including Robertson Aircraft Corp. of Missouri, which employed Charles A. Lindbergh as a mail pilot, according to the carrier’s website. The companies began consolidating in 1929 and became American Airlines in 1934.
Company stock began trading in 1939, and during World War II, half of American’s planes flew for the Air Transport Command. American pioneered nonstop transcontinental service in 1953 and 20 years later was the first major airline to hire a woman pilot, according to its website.
The case is In re AMR Corp. (AMR), 11-15463 U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Phil Milford in Wilmington, Delaware at pmilford@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net
To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net
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