High labor and fuel costs, coupled with sluggish passenger demand, prompted American Airlines to file for bankruptcy protection Tuesday. AMR Corp., the parent of American, also filed for bankruptcy.
American is the third-largest U.S. carrier after United Airlines and Delta Air Lines, both of which went through bankruptcy and found merger partners in the past decade.
The American/AMR bankruptcy was long-anticipated, although many analysts thought the carrier would wait until its cash reserves were lower. In its bankruptcy filing, AMR reported $4.1B in cash. The company has assets of $24.72B against liabilities of $29.55B.
According to Vaughn Cordle, managing partner and chief equity strategist for Washington, D.C.-based Airline Forecasts LLC, American was on track to lose $1.2B to $1.4B in 2011 and $1B to $1.3B in 2012, prior to the bankruptcy filing.
The key issue facing American was its cost competitiveness against rivals, many of which have already gone through reorganizations. Labor is the prime culprit. Cordle says the carrier has been sending the message to unions for months that if they did not moderate demands or accept concessions, the company would seek bankruptcy.
Data compiled by Airline Forecasts shows that if American had the same labor costs as United, it would save $441M a year, a 7% reduction from its current labor outlay. Other carriers are even more cost competitive. With Delta’s labor costs, American would see a 14% reduction, with US Airways a 34% reduction and with Southwest Airlines a 36% reduction. The other low-cost carriers have even lower labor costs.
James Little, president of the Transport Workers Union, which represents the majority of AMR employees, released a statement Tuesday saying the union had tried to work with management to make the company more cost competitive. He added, “This is likely to be a long and ugly process and our union will fight like hell to make sure that front line workers don’t pay an unfair price for management’s failings.”
American said it is “flying normal schedules and conducting business as usual” as it begins the Chapter 11 process. However, many in the industry predict the carrier will reduce its routes and streamline operations over the next several months.
Seth Kaplan, managing partner of Airline Weekly, says there will likely be changes at some of American’s hubs.
“As far as hubs go, I think Miami [International] (MIA) is pretty safe because of its connections to Latin America,” Kaplan says. Dallas/Fort Worth International (DFW) “is in a pretty good competitive position. I think Los Angeles [International] (LAX) is the most vulnerable because its hypercompetitive with a bunch of low-cost carriers. Their costs will come down and that makes everything a little more viable, but if the whole airline is going to shrink – which I’m sure it will – that’s one that you can picture not making the cut.
“I think Chicago is going to be an interesting question for them. It’s a three-way battle. United, which is bigger, then indirectly Southwest out of Midway (MDW),” Kaplan continues. “New York [John F. Kennedy International (JFK)] is tough for them, but I think it’s a little bit less vulnerable only because they have that huge, expensive terminal at JFK – it’s a fixed-cost situation where you have the terminal so you kind of have to utilize it.”
Smaller airports that feed those hubs could be impacted, as well, with the most susceptible being the ones that fly to LAX, Kaplan predicts. Of the airports served by American’s regional network, those with 50-seat jets that can’t support a larger plane of 70 or 90 seats are vulnerable, as the carrier will likely phase out its 50-seat jet fleet, Kaplan says.
Further down the road, a merger is likely, according to many industry analysts. The most likely partner for American is thought to be US Airways. Together, the two carriers would have the mass to better rival Delta and United.
It’s a familiar path for many U.S. carriers. United Continental Holdings’ United Airlines was formed from a merger of United Airlines and Continental Airlines. Delta purchased the former Northwest Airlines. US Airways was formed from a merger with America West Airlines. US Airways and United Airlines filed for bankruptcy protection in 2002, and Delta and Northwest in 2005.
The airlines share their outlook for 2012 in the upcoming Dec.2011/Jan.2012 issue of ARN. Get your copy now! Click Here!
