By Phil Milford, Mary Schlangenstein and David McLaughlin - Nov 30, 2011 6:08 AM 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)
Nov. 29 (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. Chairman Gerard Arpey will retire and be replaced by Thomas Horton, AMR said. Shannon Pettypiece reports on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
American Airlines parent AMR Corp. (AMR) 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 last of the so-called U.S. legacy airlines 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 trim expenses and leave bankruptcy in less than 15 months, Chairman and Chief Executive Officer Tom Horton said today. 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. A spinoff of American Eagle, which already had been delayed from this year into 2012, is on hold, Horton said.
Court Hearing
American’s cost structure compared with other airlines had become “untenable,” said Harvey Miller, the company’s bankruptcy lawyer, at a court hearing today in Manhattan. The airline “fought ferociously” to avoid filing for bankruptcy, and now planned to use the court process to turn around its business to become a profitable global airline, Miller said.
At today’s hearing, U.S. Bankruptcy Judge Sean Lane approved American’s requests to pay employees, continue its customer programs, and pay what the company said are vendors that are critical to maintaining its operations.
American said in court papers that it needed permission to pay $50 million in claims from critical vendors. Miller said the company will later request approval to pay an additional $35 million in claims.
“We are talking about an emergency and the survival of this company,” Miller said about the request. “We have to operate this airline and assure customers that when they book on American, that flight is going to be there and that flight is going to depart on time.”
Arpey Retires
Horton, 50, most recently AMR’s president, replaced Gerard Arpey today as chairman and CEO. Arpey, 53, opted to retire after the board asked him to stay, Horton said. Arpey will join Emerald Creek Group LLC, a private-equity firm founded by former Continental Airlines Inc. CEO Larry Kellner, on Dec. 1, the firm said in a statement.
Arpey supported the bankruptcy filing, Horton said. Arpey decided to leave after concluding that AMR would be better served with new leadership “because it was going in a different direction,” Tom Roberts, an attorney at Weil, Gotshal & Manges LLP who represents AMR, said in a telephone interview. “It was his decision because he had been the one that had been leading the charge for so many years to avoid bankruptcy.”
The hearing on first-day motions in the bankruptcy case is set for 4 p.m. today. AMR doesn’t plan to seek so-called debtor- in-possession financing to fund operations during bankruptcy, Horton said at a news conference at Dallas/Fort Worth International Airport.
AMR’s board voted unanimously last night to file for bankruptcy after considering options for months, Horton said. AMR was determined to avoid Chapter 11 as air travel fell and losses mounted after the 2001 terrorist attacks, even as peers used bankruptcy to shed costly pension and retiree benefit plans and restructure debt. Rival carriers later combined, giving them larger route networks that were more attractive to lucrative corporate travel customers.
‘Untenable’ Gap
“It became increasingly clear that the cost gap between us and our biggest competitors was untenable,” Horton said on a conference call. “The economic climate has been most uncertain, oil prices remain high and volatile, and all of that taken together led to the conclusion that now is the right time to take this step and put the company back on the path to long-term success.”
AMR plunged 80 percent to 33 cents in New York Stock Exchange composite trading at 1:06 p.m. The shares earlier fell as much as 88 percent. Unlike secured creditors, shareholders typically get paid last in a bankruptcy and often receive nothing for their shares.
The stock had declined 79 percent this year before today on concern that a Chapter 11 filing was inevitable as AMR’s losses drained cash reserves. AMR had $4.1 billion in unrestricted cash and short-term investments as of Nov. 25, Chief Financial Officer Isabella Goren said in an affidavit.
Union Talks
AMR’s bankruptcy filing “resets” the process for union talks, Horton said. American had been 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.
AMR has the highest operating costs among the four surviving major U.S. network airlines, Goren said in court papers. The company is set to post its fourth-straight annual loss this year and analysts had forecast a loss for next year as well.
“AMR cannot continue to progress toward a viable and stable future without further, significant remediation of its uncompetitive cost structure,” Goren said.
American fell from its perch as the biggest airline by traffic after Delta Air Lines Inc. (DAL) bought Northwest Airlines Corp. in 2008, then slid to No. 3 last year when UAL Corp.’s United Airlines and Continental Airlines Inc. merged.
Hub-and-Spoke
All operate traditional hub-and-spoke systems, with their own regional units or partner airlines ferrying passengers to be collected at larger airports. US Airways Group Inc. (LCC) is the other major carrier with that kind of route network. It ranks No. 5 in the U.S. by traffic, behind Southwest Airlines Co. (LUV), the largest discounter.
In late 2005, Delta, Northwest and UAL were all under bankruptcy protection. US Airways left Chapter 11 in September of that year through a merger with America West Holdings Corp.
American 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.
‘Leaner, Stronger’
“You would expect a leaner, stronger company to emerge from bankruptcy,” Chris Logan, an analyst at Echelon Research & Advisory LLP in London, said today by telephone. “As they are in Chapter 11, it will be more easy to demand concessions from the labor force.”
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.
“We agreed to sacrifice based on the expectation that our airline would regain its leadership position,” David Bates, president of the Allied Pilots Association, told members in an e-mail. “What has transpired since has been nothing short of a ‘perfect storm.’”
The Transport Workers Union, which represents aircraft mechanics and baggage handlers, “will fight like hell to make sure that front-line workers don’t pay an unfair price for management’s failings,” James Little, the union’s international president, said in a statement today.
‘Loss of Jobs’
“It’s a loss of jobs I worry most about,” Laura Glading, president of the Association of Professional Flight Attendants, said in an interview. “That’s a horrible, horrible nightmare in this economy. We’ll do what we can to mitigate that as much as possible.”
AMR had about 80,800 employees at the end of September, including 67,100 at American, with the rest at American Eagle, cargo operations and other units, according to the company’s October earnings release. American has 8,700 active pilots, with another 950 on furlough, and 17,000 flight attendants.
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. 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.
Sept. 11
After the Sept. 11 terrorist attacks in 2001, carriers saw “a dramatic drop in air travel” for 18 months to two years, FareCompare.com CEO Rick Seaney said in an interview. Airlines in the U.S. lost about $9.7 billion in the year following the attacks that destroyed the World Trade Center’s twin towers in New York and damaged the Pentagon. American, which operated two of the four hijacked planes used in the attacks, posted losses for four straight years afterward.
American responded by negotiating the union concessions that helped to restore profit in 2006 and 2007. The carrier had blamed losses since then partly on its labor costs and slower- than-expected gains from business ventures with partners across the Atlantic and Pacific.
The airline also has a fleet of older, less fuel-efficient planes that put it at a disadvantage when fuel prices rise. AMR spent $1.56 billion more on fuel through the first nine months of this year than a year earlier, according to the company’s third-quarter earnings release.
Flights Shuffled
In September 2009, the carrier shuffled flight schedules to increase operations in Chicago, New York, Dallas-Fort Worth, Los Angeles and Miami to attract more high-fare business travelers.
“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.”
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.
MD-80s Replaced
American’s mainline jet fleet of 619 planes includes 247 twin-engine MD-80s made by McDonnell Douglas Corp., according to the airline’s website. Boeing acquired McDonnell Douglas in 1997. Those planes, which are no longer in production, are being replaced by Boeing 737-800s that are about one-third more fuel efficient.
Placing an order for aircraft “creates a contract,” and in bankruptcy accepting or rejecting the contract will be up to AMR, said Scott Peltz, the national leader of RSM McGladrey’s Financial Advisory Service in Chicago. Boeing and other suppliers will probably have representatives at AMR’s bankruptcy hearings who “will be looking at what their options are,” he said.
Boeing said it has “no reason to doubt” that the jet order remains pivotal to AMR. Boeing and Airbus will provide $13 billion of financing on the first 230 jets, American said in July.
‘Key Part’
“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 Chicago-based Boeing, said in an e-mailed statement.
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.
Weil Gotshal, based in New York, is AMR’s lead bankruptcy counsel. The company’s financial adviser is Rothschild Inc.
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., 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; David McLaughlin in New York at dmclaughlin9@bloomberg.net
To contact the editors responsible for this story: John Pickering at jpickering@bloomberg.net; Michael Hytha at mhytha@bloomberg.net
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