After resisting for a decade, the parent company of American Airlines on Tuesday said it would now follow a strategy that the rest of the industry chose long ago: Filing for bankruptcy protection so it can shed debt, cut labour costs and find a way back to profitability.
American?s parent, the AMR Corporation, was the last major domestic airline that had never sought Chapter 11 protection. Its main rivals, including Delta Air Lines and United Airlines, used the bankruptcy courts to reorganise their businesses in recent years and emerged as stronger, more profitable rivals.
American, meanwhile, has lost more than $11 billion since 2001, while falling off its perch as the nation?s largest airline as mergers between first Delta and Northwest, and then United and Continental, created bigger competitors. The airline?s troubles were compounded by high labour costs, including pensions that are the richest in the industry, and surging fuel prices.
The decision to file for bankruptcy, which was endorsed by a unanimous vote of the company?s board on Monday evening, was a defeat for Gerard J Arpey, who has run the airline since 2003 and had staunchly resisted such a move.
?It?s no secret that we have tried exceptionally hard over the last decade to avoid this outcome,? he wrote in an emotional message to employees.
Rather than guide the airline through bankruptcy, Arpey, 53, decided to retire as chairman and chief executive and take a job in private equity investing. He was succeeded by AMR?s president, Thomas W Horton, 50, another longtime hand at the airline, who was AT&T?s chief financial officer for four years before returning to AMR in 2006.
Despite Arpey?s long tenure as AMR?s chief executive, he does not appear to be bailing out with a golden parachute. Under the terms of his contract, he will not receive any severance, according to the research firm Equilar. And with AMR closing at 26 cents a share on Tuesday, his stock holdings are essentially worthless.
As other airlines have done in similar cases, American said it would continue to operate its regular schedule throughout the bankruptcy process. It said flights, ticket sales, overseas alliances and frequent flyer programmes would not be affected. Employees will continue to be paid and receive health benefits.
Wall Street analysts said AMR, which has about $4.1 billion in cash and short-term investments, was seeking court protection before its financial position completely deteriorated.
?This is not a defensive move, but an offensive bankruptcy where they go after their labour groups to reduce costs,? said Bob McAdoo, an airline analyst at Avondale Partners. ?They have a great franchise and a lot of cash. They are not being forced into bankruptcy here. They have a problem with their cost structure that they want to tackle.?
The decision might eventually lead to a smaller airline, with fewer employees, fewer planes and fewer destinations. Seth Kaplan, an aviation specialist with Airline Weekly, said hubs like Dallas and Miami, where American has a strong competitive position, would probably be spared, while Los Angeles and Chicago, where it is not a market leader, might be more vulnerable to cuts.
American has long argued that its labour costs were $800 million a year higher than its rivals? because its pilots fly fewer hours and have less flexible work rules.