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American Airlines seeks profitability via bankruptcy
By Aaron Karp | November 30, 2011
Citing an "untenable" cost disadvantage compared to its primary competitors, American Airlines (AA) parent AMR Corp. filed for Chapter 11 bankruptcy protection in a New York court Tuesday and announced the resignation of chairman and CEO Gerard Arpey. President Tom Horton assumed the roles of chairman and CEO and began making the case that better times are ahead for the Dallas-based carrier.
"The last decade has been extraordinarily hard for the US airline industry," Horton said at a Tuesday news conference. He explained that AA had done all it could to restructure outside of bankruptcy but couldn't get its cost base, particularly labor expenses, low enough. "All of our competitors have taken this path, some more than once," he said. "It's a well worn path."
Horton said AA has "great assets" that will enable profitability if it can lower its cost structure. Among these, he said, are hubs in key US markets
Arpey ends 8-year quest to avoid Chapter 11
By Aaron Karp | November 30, 2011
From the moment in 2003 when he took over as American Airlines (AA) chairman and CEO, replacing Don Carty just as the Dallas-based carrier was narrowly avoiding a Chapter 11 filing, Gerard Arpey spent eight years trying to prove that a major US legacy airline could both avoid bankruptcy and achieve sustained profitability.
With Tuesday's announcement that AA parent AMR Corp. has filed for Chapter 11 protection and Arpey has stepped down, the airline finally came to the conclusion that only through bankruptcy reorganization is future profitability possible.
Back in 2003, AA employees accepted $1.8 billion in annual wage and benefit givebacks and the elimination of 9,300 jobs. The airline squeezed vendors, lessors, lenders and suppliers for a further $200 million in yearly savings. These actions enabled AA to avoid the fate that all other US legacy airlines met between 2001 and 2005: restructuring under the oversight of a US bankruptcy court. But the other airlines used the process to achieve deeper cost cuts and receive more labor concessions than AA.
In May 2006, Arpey was already signaling the tough road ahead. Speaking then to analysts at a Bear Stearns conference, he said rivals United Airlines, Northwest Airlines, Delta Air Lines and US Airways had "leveraged marketplace failure to reduce their costs … We now find ourselves with relatively high costs among our peers. Each additional dollar of savings becomes harder to come by but we are looking under every rock."
As it turned out, there were not enough rocks for Arpey to turn over. Even as the rest of the US industry found its way back to profitability (ATW Daily News, Nov. 23), AA has bled red ink quarter after quarter (ATW Daily News, Oct. 20).
In October, while discussing the carrier's $162 million third-quarter deficit, Arpey said the company needed to tackle a key "structural" impediment: the lack of "next-generation labor contracts … more in line with the competitive market realities." To that end, airline management had engaged in "very focused and intensive dialogue" with the Allied Pilots Assn. representing AA flight deck crew, according to Arpey.
But a deal with the pilots remains elusive. New chairman and CEO Tom Horton, who had been serving as AA's president, said negotiations with the airline's unions will continue during the restructuring process.
In a letter sent Tuesday to AA employees, Arpey said, "It's no secret that we have tried exceptionally hard over the last decade to avoid this outcome. But the [Chapter 11] process also represents an opportunity to rebuild AA in a way that assures it will not just survive, but thrive and win in the global marketplace."
It is clear, however, that filing for bankruptcy was not Arpey's preferred option. "I respect the decision of the board of directors to take this path," he wrote, noting that the board asked him to remain at the helm during the reorganization but he declined. Instead, he will join former Continental Airlines CEO Larry Kellner's Houston-based investment firm Emerald Creek Group.
and a range of international partnerships, most prominently its membership in the oneworld alliance and antitrust-immunized joint ventures with British Airways and Iberia on transatlantic flights and with Japan Airlines on transpacific flying.
Most important, he said, is the massive order announced in the summer for 130 Airbus A320 family aircraft (to be split between A319s and A321s), 130 re-engined A320neos, 100 Boeing 737NGs and 100 re-engined 737 Max aircraft (ATW Daily News, Oct. 5). "That deal gives us enormous flexibility to grow the company as we get our costs and capital in line," Horton said.
Since Boeing and Airbus have agreed to help finance the aircraft, the split order is not believed to be in jeopardy. In a recent report, Bernstein Research said the order is a "valuable asset" for a restructuring company, representing "a huge number of delivery slots from both Airbus and Boeing at a time when both manufacturers [are] sold out of narrowbody airplanes into 2016."
AMR's board of directors said in a statement that filing for Chapter 11 was necessary "to achieve a cost and debt structure that is industry competitive and thereby assure [AA's] long-term viability."
The company said that AA and regional affiliate American Eagle would "continue conducting normal business operations."
AA was the sole US major international airline to avoid filing for bankruptcy in the turbulent 2001-2005 period that followed the Sept. 11 terrorist attacks. The carrier has incurred losses in four straight quarters even as other US airlines have returned to the black (ATW Daily News, Oct. 20).
AMR said it has approximately $4.1 billion in unrestricted cash and short-term investments available, which should enable it to pay its bills during the Chapter 11 process. Deutsche Bank senior analyst Michael Linenberg said in a Tuesday research note that the "bankruptcy filing is specific to AMR" and should not dampen continuing profitability for the rest of the US industry.
ATW Home » Airline Finance / Data »
American Airlines seeks profitability via bankruptcy
By Aaron Karp | November 30, 2011
Citing an "untenable" cost disadvantage compared to its primary competitors, American Airlines (AA) parent AMR Corp. filed for Chapter 11 bankruptcy protection in a New York court Tuesday and announced the resignation of chairman and CEO Gerard Arpey. President Tom Horton assumed the roles of chairman and CEO and began making the case that better times are ahead for the Dallas-based carrier.
"The last decade has been extraordinarily hard for the US airline industry," Horton said at a Tuesday news conference. He explained that AA had done all it could to restructure outside of bankruptcy but couldn't get its cost base, particularly labor expenses, low enough. "All of our competitors have taken this path, some more than once," he said. "It's a well worn path."
Horton said AA has "great assets" that will enable profitability if it can lower its cost structure. Among these, he said, are hubs in key US markets
Arpey ends 8-year quest to avoid Chapter 11
By Aaron Karp | November 30, 2011
From the moment in 2003 when he took over as American Airlines (AA) chairman and CEO, replacing Don Carty just as the Dallas-based carrier was narrowly avoiding a Chapter 11 filing, Gerard Arpey spent eight years trying to prove that a major US legacy airline could both avoid bankruptcy and achieve sustained profitability.
With Tuesday's announcement that AA parent AMR Corp. has filed for Chapter 11 protection and Arpey has stepped down, the airline finally came to the conclusion that only through bankruptcy reorganization is future profitability possible.
Back in 2003, AA employees accepted $1.8 billion in annual wage and benefit givebacks and the elimination of 9,300 jobs. The airline squeezed vendors, lessors, lenders and suppliers for a further $200 million in yearly savings. These actions enabled AA to avoid the fate that all other US legacy airlines met between 2001 and 2005: restructuring under the oversight of a US bankruptcy court. But the other airlines used the process to achieve deeper cost cuts and receive more labor concessions than AA.
In May 2006, Arpey was already signaling the tough road ahead. Speaking then to analysts at a Bear Stearns conference, he said rivals United Airlines, Northwest Airlines, Delta Air Lines and US Airways had "leveraged marketplace failure to reduce their costs … We now find ourselves with relatively high costs among our peers. Each additional dollar of savings becomes harder to come by but we are looking under every rock."
As it turned out, there were not enough rocks for Arpey to turn over. Even as the rest of the US industry found its way back to profitability (ATW Daily News, Nov. 23), AA has bled red ink quarter after quarter (ATW Daily News, Oct. 20).
In October, while discussing the carrier's $162 million third-quarter deficit, Arpey said the company needed to tackle a key "structural" impediment: the lack of "next-generation labor contracts … more in line with the competitive market realities." To that end, airline management had engaged in "very focused and intensive dialogue" with the Allied Pilots Assn. representing AA flight deck crew, according to Arpey.
But a deal with the pilots remains elusive. New chairman and CEO Tom Horton, who had been serving as AA's president, said negotiations with the airline's unions will continue during the restructuring process.
In a letter sent Tuesday to AA employees, Arpey said, "It's no secret that we have tried exceptionally hard over the last decade to avoid this outcome. But the [Chapter 11] process also represents an opportunity to rebuild AA in a way that assures it will not just survive, but thrive and win in the global marketplace."
It is clear, however, that filing for bankruptcy was not Arpey's preferred option. "I respect the decision of the board of directors to take this path," he wrote, noting that the board asked him to remain at the helm during the reorganization but he declined. Instead, he will join former Continental Airlines CEO Larry Kellner's Houston-based investment firm Emerald Creek Group.
and a range of international partnerships, most prominently its membership in the oneworld alliance and antitrust-immunized joint ventures with British Airways and Iberia on transatlantic flights and with Japan Airlines on transpacific flying.
Most important, he said, is the massive order announced in the summer for 130 Airbus A320 family aircraft (to be split between A319s and A321s), 130 re-engined A320neos, 100 Boeing 737NGs and 100 re-engined 737 Max aircraft (ATW Daily News, Oct. 5). "That deal gives us enormous flexibility to grow the company as we get our costs and capital in line," Horton said.
Since Boeing and Airbus have agreed to help finance the aircraft, the split order is not believed to be in jeopardy. In a recent report, Bernstein Research said the order is a "valuable asset" for a restructuring company, representing "a huge number of delivery slots from both Airbus and Boeing at a time when both manufacturers [are] sold out of narrowbody airplanes into 2016."
AMR's board of directors said in a statement that filing for Chapter 11 was necessary "to achieve a cost and debt structure that is industry competitive and thereby assure [AA's] long-term viability."
The company said that AA and regional affiliate American Eagle would "continue conducting normal business operations."
AA was the sole US major international airline to avoid filing for bankruptcy in the turbulent 2001-2005 period that followed the Sept. 11 terrorist attacks. The carrier has incurred losses in four straight quarters even as other US airlines have returned to the black (ATW Daily News, Oct. 20).
AMR said it has approximately $4.1 billion in unrestricted cash and short-term investments available, which should enable it to pay its bills during the Chapter 11 process. Deutsche Bank senior analyst Michael Linenberg said in a Tuesday research note that the "bankruptcy filing is specific to AMR" and should not dampen continuing profitability for the rest of the US industry.
