American Airlines (AA), the only major airline that did not submit to Chapter 11 bankruptcy over the past decade, seems to be on the bankruptcy ropes. Its stock plummeted 33 percent yesterday as rumors were flying across Wall Street. Will it go into Chapter 11 protection in order to bring its costs down like its competitors?
The airline, even as it handed out millions of dollars in executive bonuses, claimed that its pilots, flight attendants, mechanics and other workers’ salaries put it at a competitive disadvantage.
With foreshadowing, news reports note, “the airline has operating costs that are higher than those of competitors.” That kind of wording in aviation circles linked with possible bankruptcy is not good news for the AA unions.
It is not good news for AA’s major oneworld partners and worse news for International Airline Group (IAG), made up of British Airways and Iberia, that has antitrust immunity agreements and a joint venture in place with American.
“The worries about American filing for bankruptcy do not bode well for the profit sharing joint venture with IAG. Presumably the pot is smaller if American is losing so much money,” said Davy Stockbrokers analyst Stephen Furlong.
“A negative for IAG is that is seems to have one of the weaker US partners and how much help American actually needs.”
Other media outlined the AA financial position, that does not appear encouraging.
The decline on Monday was the steepest drop for American’s parent, the AMR Corporation, in a decade, and it precipitated a general sell-off in airline stocks throughout the day. AMR shares closed at $1.98 after setting off repeated automatic trading halts meant to prevent widespread losses. Still, Delta Air Lines and United Continental Holdings both fell more than 11 percent, and US Airways lost nearly 16 percent.
Even before Monday’s drop, American’s shares were down 62 percent since the start of the year. The severity of the decline, which sent the stock price to its lowest level since 2003, forced the carrier to dismiss speculation that it might be considering a prepackaged bankruptcy.
Business Week presented the sorry picture this way.
AMR led stock-price declines this year through yesterday among the largest U.S. airlines, falling 75 percent, and is headed toward a fourth consecutive annual loss. The shares closed yesterday at $1.98 in New York Stock Exchange composite trading.
That gave AMR a market value of about $663.7 million, ranking ninth in the U.S. industry by that measure. That’s less than the list price of three new Boeing Co. 777-300ER jets, the largest planes American flies.
Even a company spokesman noted in a statement that Chapter 11 “is certainly not our goal or our preference.” These words are hardly reassuring.
The airline management seems to have managed over the past year to pick legal fights with its entire universe of employees, suppliers and its distributors. Its legal bills alone may be a part of its poor balance sheet. It is in legal proceedings or tense negotiations with its pilots, flight attendants, traditional travel agents, online travel agencies, computer reservation systems and advocacy groups.
My bet: Expect a Chapter 11 bankruptcy sooner than later. After years of losses, they may fall on court protection to allow them to restructure.
Charlie Leocha is the President of Travelers United. He has been working in Washington, DC, for the past 14 years with Congress, the Department of Transportation, and industry stakeholders on travel issues. He was the first consumer representative to the Advisory Committee for Aviation Consumer Protections appointed by the Secretary of Transportation from 2012 through 2018.
