Nov 292011
 
Authors: Andrea Ahles McClatchy Tribune

FORT WORTH, Texas — American Airlines will get customers to their holiday destinations this year, but the Fort Worth-based carrier will likely get smaller in 2012 as its parent company, AMR Corp., reorganizes under Chapter 11 bankruptcy.

The carrier said high labor costs, rising fuel prices and billions in debt led it to file for bankruptcy protection Tuesday morning in a New York federal court. As part of the reorganization, AMR Chief Executive Gerard Arpey stepped down and was replaced by the company’s president, Tom Horton.

“No company ever wants to face a restructuring like this.… We spent 10 years trying to avoid this,” Horton said at a Tuesday news conference. “The future on the other side of this restructuring we think is very bright.”

AMR assured customers that it will continue to operate a normal flight schedule for American and its regional subsidiary, American Eagle, and honor its frequent flier miles.

But industry analysts say that the carrier will likely terminate leases on less fuel-efficient aircraft and cut unprofitable routes starting in January. Layoffs or early retirement offers may occur early next year, analysts speculated.

“The first 60 days have an awful lot to do with labor and fleet, which is the reason why this company is in bankruptcy today and wasn’t yesterday,” said Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology. “The process begins of downsizing the American that we knew.”

The decision to file bankruptcy came shortly after the company failed to reach new contract agreements with its pilots union and other labor groups. Just two weeks ago, it appeared that a deal was within reach as American made a comprehensive offer to the pilots after talks intensified. But the offer was rejected and the pilots put off more talks.

Horton said American has a cost disadvantage compared to other legacy carriers such as United Continental and Delta Air Lines, both of which went through Chapter 11 reorganizations in the past decade and subsequently became larger through mergers.

“If you look at our labor costs and compare it roughly to the other big legacy carriers, the difference between our contracts and theirs is about $800 million a year,” Horton said.

In its bankruptcy filing, AMR said it had $24.7 billion in assets and $29.6 billion in debt. It had an initial court hearing Tuesday afternoon and attorneys said they expect a creditors’ committee to be formed within a few days.

With $4.1 billion in cash, the company does not need to obtain debtor-in-possession financing to maintain operations in bankruptcy court. By entering bankruptcy while it has enough cash to fund operations, AMR management has a little more control over the process. Horton said the carrier hopes to move quickly and emerge from bankruptcy within 18 months. Delta’s bankruptcy took 20 months, while United’s took more than three years.

Leaders at American’s labor unions called the bankruptcy filing disappointing. “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 David Bates told pilots in a message on Tuesday.

Employees are concerned that American might terminate its pension plans and retirement benefits during the bankruptcy process. The carrier has 88,000 workers, including between 24,000 and 25,000 in North Texas who work at Dallas/Fort Worth International Airport, its headquarters, flight academy, reservations office and maintenance base at Alliance Airport.

The Pension Benefit Guaranty Corp., the federal agency that protects private employee pension benefits, estimated that American workers could lose $1 billion in pension benefits if the carrier terminates the plans.

“Unfortunately, when the agency assumed airline plans in the past, many people’s pensions were cut – in some cases, dramatically,” said the agency’s director, Josh Gotbaum.

American has four plans that cover 130,000 participants. They have about $8.3 billion in assets to cover about $18.5 billion in benefits, the PBGC said.

Shares of AMR Corp. closed at 26 cents on Tuesday, down almost 84 percent from its previous close. Analysts expect shareholders will be wiped out during the restructuring process.

Rising fuel costs have hurt American this year, with the carrier saying it will pay $2 billion more for fuel than in 2010. Its older fleet, including more than 200 MD-80s that average 16 years in age, is less fuel-efficient than competitors.

The company has lost money in eight of the past ten years, and analysts expect it to post another $1 billion loss this year.

AMR also faces large debt payments. The company had $1.8 billion due by the end of 2012. The net debt at the end of the third quarter was $16.9 billion.

“We are now at a point where we need to turn the page and move forward,” Horton said.

In a letter sent to AMR employees, Arpey said the company’s board asked him to stay on as CEO but that he chose to retire.

“After careful consideration, I concluded that my remaining in those roles would not be best for the company,” Arpey said. “In my view, executing the board’s plan will require not only a re-evaluation of every aspect of our business, but also the leadership of a new chairman and CEO who will bring restructuring experience and a different perspective to the process.”

Arpey, 53, will join Houston-based Emerald Creek Group, a private equity firm founded by former Continental Airlines Chief Executive Larry Kellner.

American’s union leaders had long criticized Arpey and company’s management team for receiving millions in bonuses after rank-and-file workers had taken pay cuts to keep the company out of bankruptcy several years earlier. As executive compensation rose, American’s competitive position in the industry slid.

The carrier was the largest U.S. airline in 2008 but lost its top position to Delta Air Lines when it merged with Northwest Airlines in 2009. American slipped to third following United Airlines’ merger with Continental Airlines in 2010.

To help regain its competitive edge, American in July announced the largest plane order in aviation history, saying it would buy 460 planes from Airbus and Boeing with aircraft deliveries expected to start in 2013.

The massive order would replace most of its domestic fleet with more fuel-efficient aircraft.

The first 230 planes in the order were financed through the aircraft manufacturers.

Horton said the company plans to honor its contracts with Airbus and Boeing as it forms the foundation of American’s restructuring plan. But analysts don’t know if new planes, a cheaper workforce and fewer routes will be enough to return American to its industry-leading position.

Some speculate that American may need to merge with another carrier.

“To get on the other side, I think they’re going to have to look at merging with somebody,” said Vaughn Cordle, an airline consultant at AirlineForecasts.com.

The most likely candidate is US Airways, which went through bankruptcy twice in the past decade. Its chief executive, Doug Parker, has indicated that he believes there should be another merger among the legacy carriers and his own.

Some analysts believe a US Airways–American merger makes sense, while others are not so sure.

American is the largest carrier at Dallas/Fort Worth Airport, operating about 85 percent of all of the flights out of DFW. The airport is currently renovating the older terminals where American operates as part of a $1.9 billion project.

“While the situation is fluid due to AMR’s bankruptcy filing, operations are business as usual at DFW,” said airport Chief Executive Jeff Fegan.

At Tuesday’s Tarrant County Commission meeting, Tax Assessor Ron Wright said the county had filed tax liens against 365 American planes at DFW to protect the county as debts are discharged.

“When it’s a corporation that big and there’s a possibility of bankruptcy, we move to act in the taxpayers’ best interest,” he said, adding, “Obviously, we hoped they would stave off bankruptcy.”

Fort Worth Mayor Betsy Price said she hopes the company’s move will have as minimal an impact as possible on Fort Worth and the Metroplex.

“If there’s anything we can do, we are a resource,” she said. “Obviously, we are confident they are going to find their way through and become very competitive again.”

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