What Europe And State Governments Should Learn From American Airlines

American Airlines is a sad example of the type of over-regulation that is strangling the U.S. economy.

On Monday, the airline’s parent company, AMR Corp (AMR), voluntarily filed for Chapter 11 bankruptcy protection. AA had fallen from its perch as the world’s largest airline to number three in the U.S. after the cost gap between it and its competitors (who had already gone through bankruptcy) became too great to overcome.

U.S. states and European countries need to learn from this example, and get ahead of the game to avoid ending up like American Airlines.

The reason American Airlines’ cost structure became unsustainable was because it tried to fight the inevitable. Air travel fell dramatically following the 9/11 terrorist attacks, and all major airlines, except AA, used bankruptcy protection to restructure pension plans and debt. The weight of massive retirement plans cut into profits, so naturally there was only one solution.

American Airlines, long resistant to the idea of bankruptcy, is the last of the “U.S. legacy airlines” to go through the Chapter 11 bankruptcy process to bust unions and renegotiate labor deals. AMR has been in negotiations with unions since 2006 as it sought to trim the estimated $800 million cost difference between itself and competitors. Workers refused to make concessions, now they will have to make large ones.

“It became increasingly clear that the cost gap between us and our biggest competitors was untenable,” new CEO Tom 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.”


Isn’t that refreshing to hear?

It became clear to the rest of the airline industry that bankruptcy was a painful, but necessary step as the system became unsustainable.  While they experienced some short term-pain, hitting the reset button allowed them to restructure the system and protect their future. Why can’t the rest of the world understand that concept?

The world economy continues to kick the can down the road. The excessively low interest rates, unsustainable growth and massive leveraging over the last 30 years created a ticking time bomb that was set off in 2008 by the bundling and 30-1 leveraging of  subprime mortgages. Newton’s third law of physics stated that for every action there is an equal and opposite reaction, and policy makers are trying to engineer voo-doo science to prevent that snap-back.