Nov. 29, 2011 at 7:17 AM ET
American Airlines, the nation’s third-largest carrier, has filed for Chapter 11 bankruptcy reorganization, seeking the same route out of high debt and costs that many of its major rivals have taken in the past decade.
"The path ahead will be hard. But it's a well-worn path," newly-appointed Chairman and Chief Executive Officer Thomas W. Horton said Tuesday, at a news conference to discuss the move by the airline's parent company, AMR Corp.
The airline said it would be operating normal flight schedules and honoring tickets, as usual, during the process. It added its frequent flier program is not affected. "American expects to continue normal business operations throughout the reorganization process, and the business will continue to be operated by the company's management," AMR said in a statement.
Bit airline industry analyst Seth Kaplan of Airline Weekly thinks otherwise. "Cuts will come," he said. "They’ve said everything is normal for now, but the cutting will surely start soon. They’ll reduce aircraft, employees and routes."
AMR said it took the action so that it could "achieve a cost and debt structure that is competitive in the airline industry."
Many of American's rivals — among them Delta, Northwest, United and US Airways — have filed for bankruptcy reorganization over the past decade to address issues with debt and costs, especially labor and fuel costs. Reuters reported that wages and benefits for AMR's union workers are higher as a percentage of operating expenses than at its rivals. American is the only major airline that still must fund its workers' pensions.
The airline pilots union called the bankruptcy a "somber occasion."
"While today’s news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way," Allied Pilots Association President Captain Dave Bates said in a statement.
"The 18-month timeline allotted for restructuring will almost certainly involve significant changes to the airline’s business plan and to our contract," he added.
"Labor is going to take a major hit. Their pensions are in danger," Darryl Jenkins, a consultant who has worked for the major airlines, told The Associated Press.
The Pension Benefit Guaranty Corporation estimated Tuesday that American Airlines' employees could lose up to $1 billion in benefits if the carrier terminated the plans in bankruptcy. Reuters reported that an American Airlines pension plan default would be the largest in U.S. history as its accounts are underfunded by $10 billion.
"A termination would also weaken the financial condition of PBGC, which has a record $26 billion deficit as a result of failed plans the agency has already assumed," PBGC Director Josh Gotbaum said in a statement.
Last month, the airline reported a third-quarter loss of $162 million, or 48 cents a share, due to higher jet fuel prices. Reuters said AMR listed assets of about $24.72 billion and liabilities of $29.55 billion. The company said it has $4.1 billion in cash.
"This was a difficult decision, but it is the necessary and right path for us to take — and take now — to become a more efficient, financially stronger, and competitive airline," Horton said in a statement. Horton, 50, was named CEO Tuesday, succeeding the company's long-time chief executive, 53-year-old Gerard Arpey, who told the company's board Monday that he would retire.
Arpey received compensation valued at about $5.2 million in 2010, an 11 percent increase over 2009, according to an Associated Press analysis. The AP said that Arpey's increase was due mostly to higher values for stock options at the time they were granted. AMR reported a loss of $471 million in 2010.
"But as we have made clear with increasing urgency in recent weeks, we must address our cost structure, including labor costs, to enable us to ... secure our future," Horton added.