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Would American Airlines Be Better Off If It Filed Bankruptcy?

Posted By admin || 12-Mar-2009

American Airlines is in the news again, competing with other airlines who have filed for bankruptcy such as Delta, Northwest, United and US Airways has been a struggle. According to an article in the Dallas Morning News, many analysts are wondering aloud about whether or not American Airlines would be better off filing for Chapter 11 bankruptcy.

Tom Horton, the CFO of American Airlines gives a resounding NO to bankruptcy according to the article:

"That's not our intent and I think everybody in this room knows by our past actions, so that's really, that's something this company doesn't view as a primary option. I mean it's just not something we think about.

"As to your question about things that could be addressed in bankruptcy, I would just look at the precedents. " Certainly, there is an avenue to set labor costs to market. The others have done that. When we had our restructuring back in 2003, I think we and our various constituencies felt like we had done the right thing. And unfortunately, shortly thereafter everybody else tumbled into bankruptcy and took their labor cost that much lower. And, so that has made a great challenge for us.

"At the same time though, I think we've done a pretty good job of managing non-labor costs. And so we're able to offset a fair bit of that labor cost disadvantage through our non-labor cost. But clearly, labor costs are a challenge. It's something we work through, and we're working through with our labor unions as we speak. But it's challenging. And, a court supervised process is that, it's a process for addressing that, among other things.

A Chapter 11 bankruptcy would definitely help American Airlines reduce or discharge much of its unsecured debt which has become an albatross to growth with rising costs and labor expenses which are keeping down profits. But for workers, an American bankruptcy would probably push wages down to new low in the airline industry, which has already happened at the other airlines during Chapter 11 bankruptcy.

American is probably resisting first and foremost because he perceives bankruptcy as bad for his brand. The avenue for American Airlines to "set labor costs" is the basic shredding of former labor agreements by cutting wages and benefits for airline employees and of course layoffs. We discussed this previously regarding the American Airlines pilots who've been working under lower wages since 2003.

Reduced wages and job losses in the current financial environment could spell disaster for ordinary workers who have little savings and tons of debt. Unfortunately for workers, Mr. Horton may be successful in reducing labor costs; but that will mean less money for workers and perhaps financial disaster for those already living paycheck to paycheck.

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