Anatomy of the American Airlines Bankruptcy

The reason American Airlines filed Chapter 11 bankruptcy is so that it could break promises it made to its employees and its aircraft suppliers. It is the only major airline that had not filed bankruptcy after 9-11.

According to its website, the airline “took this action in order to achieve a cost and debt structure that is industry competitive and thereby assure our long-term viability and ability to continue delivering a world-class travel experience for customers.”

In other words, they couldn’t stay in business if they had to keep their promises.

It couldn’t “achieve” a “cost and debt structure that is industry competitive” without bankruptcy for two main reasons.

1) Its management made some bad bets about leasing jets which are now outdated and much less fuel efficient than newer ones. It can’t get out of these lease contracts without bankruptcy.

About 40% of American’s jet fleet of 619 planes are MD-80s made by McDonnell Douglas Corp. before it was bought out by Boeing, so they are no longer in production. They are being replaced by newer jets which are about one-third more fuel efficient. Just last July the airline announced it would buy 460 single-aisle jets in the industry’s biggest-ever order, and now says it wants to still go through with that order.

2) The airline’s negotiations with its labor unions have been dragging out, with mediation scheduled to start in early December with its pilots’ union. A Chapter 11 gives management major leverage against its employees, including with the ever-sensitive issue of pension benefits.

To enable American to avoid filing bankruptcy back in the years immediately after 9/11—during 2005 Delta, Northwest, United Airlines and US Airways were all in Chapter 11—its unions made concessions worth about $1.6 billion annually. “We agreed to sacrifice based on the expectation that our airline would regain its leadership position,” wrote David Bates, president of the Allied Pilots Association. We “will fight like hell to make sure that front-line workers don’t pay an unfair price for management’s failings,” according to James Little, the international president of the Transport Workers Union, which represents aircraft mechanics and baggage handlers.

Why did American file Chapter 11 now? It did not have an immediate cash crunch—it had $4.1 billion in cash and short-term investments to fund current operations. It did not even have to look for immediate “debtor-in-possession” financing when it filed its Chapter 11 case, as is often the case. The timing must surely have had to do with its labor negotiations. Plus the company had some big debts coming due next year, and ever increasing pension funding costs that it hopes to dump or trim. So instead of waiting until it had not choice, the company filed the bankruptcy reorganization as a strategic move.

Check back here for my next blog, which I’m calling “The Morality of the American Airlines Chapter 11 Reorganization,”comparing it to an individual filing a consumer bankruptcy.