IN BUSINESS, virtue is not always rewarded. Ford briefly gained some kudos among politicians and the public for being the only one of Detroit's big three carmakers not to file for bankruptcy in the wake of the financial crisis, but is now stuck with higher costs than its rivals. The same is true of AMR, the parent company of American Airlines, one of the few big American carriers which hitherto has resisted using the bankruptcy laws to rid itself of liabilities towards shareholders, creditors and its pension scheme. Continental has gone through bankruptcy twice (1983 and 1990), as has US Airways (2002 and 2004). However, when your reporter recently met a senior figure at American Airlines, he said that much as the company was keen to continue honouring its debts, "maybe the final chapter is not written yet".
Today, AMR reached Chapter 11, saying that bankruptcy proceedings had become necessary "to achieve a cost and debt structure that is industry competitive and thereby assure our long-term viability." Although the company has debts of around $30 billion, it said it has $4.1 billion of cash at hand, which it insists is more than enough to keep it flying during its restructuring. Passengers, staff and suppliers should notice no differences during the Chapter 11 process.
Network airlines are, in America and much of the rich world, licences to lose money or make miserly returns—and AMR is no exception. It has lost money in all but two of the past ten years, and was expected to run up more losses this year and next. The darkening outlook for the world economy means the chances of turning a profit any time soon are receding.
Recently, as fears of a bankruptcy filing have grown, the company's share price has fallen. There has also been a rush among its older pilots to retire to capture their pension benefits, which would be cut in a restructuring. The airline had been talking to its pilots for five years about new contracts that would allow it to reduce its costs, but neither these nor the company's talks with cabin crews and mechanics had got very far. The lack of progress in the talks with the pilots' union has also hindered AMR's plan to spin off its regional airline, American Eagle, another key part of the group's cost-cutting plan. Presumably the bankruptcy filing will now help to concentrate minds at the negotiating table.
Perhaps the most ambitious part of AMR's plan to break through the clouds into profitable blue skies is the huge orders it recently placed with Boeing and Airbus. The idea is to replace its fleet with planes that are significantly cheaper to run. The senior AMR executive I spoke to recently acknowledged that the two plane makers had made a leap of faith in allotting such a big chunk of their future production to the airline, but that this showed they regarded AMR as reliable. This will probably not change as a result of the bankruptcy filing: indeed, by allowing AMR to shake off some of its liabilities and cut its future costs, it will be in a better position to pay for those shiny new planes.
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