American Airlines Files Bankruptcy

Labor costs, fuel prices, debt cited in AMR bankruptcy

Andrea Ahles
Fort Worth Star-Telegram
Nov. 29, 2011

Citing high labor costs, rising fuel prices and heavy debt, the parent of Fort Worth-based American Airlines announced Tuesday that it had filed for Chapter 11 bankruptcy and that chief executive Gerard Arpey would step down to allow the reorganization to proceed smoothly.

AMR Corp. said it will continue to operate a normal flight schedule for American and its regional subsidiary, America Eagle, while it is reorganizing in bankruptcy.

The airline named its current president, Tom Horton, as the company's new chief executive.

"This was a difficult decision, but it is the necessary and right path for us to take – and take now – to become a more efficient, financially stronger, and competitive airline," Horton said.

Read our Tuesday morning interview with new CEO Tom Horton

"The future on the other side of this restructuring we think is very bright," Horton said at a morning news conference. "For American Airlines, it will be business as usual."

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, American made a comprehensive offer to the pilots after talks had intensified but the offer was rejected.

Horton pointed to the cost disadvantage American has compared to other legacy carriers, such as United Continental and Delta Air Lines, both of which went through Chapter 11 reorganizations in the last decade.

"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.

AMR said it has $4.1 billion in cash and as a result, does not need to obtain debtor-in-possession financing to maintain operations while under bankruptcy protection.

"This year, we’re going to pay $2 billion more in fuel than we did last year," Harton said.

The company has had only two profitable years in the past decade, its stock has slipped to an eight-year low, closing at $1.62 on Monday.

AMR was also facing some 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.

And when $7.9 billion in underfunded pension benefits and $2.5 billion in other long-term liabilities are added, the company has close to $30 billion in debt and other long-term obligations.

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

At Tuesday morning's meeting of the Tarrant County Commissioners Court, Tax Assessor Ron Wright said the county had already filed tax liens against 365 of American's planes to protect the county as the debts are discharged.

County officials filed the liens three weeks ago against those planes based at DFW, Wright said.

"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."

In a letter sent to AMR employees, Arpey said the company's board had asked him to stay on as chief executive 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 the letter. "In my view, executing the Board's plan will require not only a reevaluation 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 will be joining Houston-based firm Emerald Creek Group, a private equity firm founded by former Continental chief executive Larry Kellner.

Over the summer, American had 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.

However, on Tuesday morning, the company had not mentioned the order in its bankruptcy filing announcement. The head of the Allied Pilots Association said the bankruptcy filing was 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," APA president Captain David Bates told pilots in a message on Tuesday morning.

"In 2003 American Airlines’ pilots provided management with significant cost savings that were characterized as essential to avoiding bankruptcy at that time. We agreed to sacrifice based on the expectation that our airline would regain its leadership position. What has transpired since has been nothing short of a “perfect storm.”

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 its 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. “For now, we anticipate that passenger levels and Airport revenues will remain strong even during the American Airlines reorganization proceedings.”

The mayors of Fort Worth and Dallas offered their support to the company and its workers.

Fort Worth Mayor Betsy Price said she learned about the bankruptcy filing about 6 a.m. Tuesday. "It wasn’t a huge surprise," she said. "It had been in the offing."

Although she said she and other officials are concerned about the company and its employees, 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."

Dallas Mayor Mike Rawlings said American’s move was "the right thing to do."

"While this was a tough decision by management, it puts American in a much better situation long term and ... the Metroplex will be better," he said. "It’s always difficult to make the right decision, but they made it."

Rawlings, who plans to fly on American Airlines Wednesday, said it’s important to support the company and its employees as it works through the bankruptcy process.

"We want to reach out emotionally to all the employees and retirees in the American Airlines system," Rawlings said. "This is a tough time, and we want to be there for them."

U.S. Sen. Kay Bailey Hutchison said she was "very disappointed" by the company's decision.

"I have worked with AA’s CEO Gerard Arpey and his representatives on pension issues and I know of the extensive efforts made by the company to keep the defined benefit pension plan for employees," she said. "I remain concerned about the company’s pension plan -- one of the most generous in the industry -- being placed in jeopardy by this unfortunate turn of events."

Not good. This is the USA's largest airline.