American Airlines and its parent company, AMR Corp. has filed for Chapter 11 bankruptcy protection. American, which was the only airline to avoid bankruptcy after the September 11th terrorist attacks in 2001, has fallen behind competitors who used bankruptcy to trim labor costs and restructure their debts.
Speculation about an AMR bankruptcy grew in recent weeks, however, as negotiations with pilots and other workers over cost-saving labor contracts seemed to stall. The company said that labor-contract rules forced it to spend at least $600 million more per year than other airlines.
Ray Neidl, an analyst with Maxim Group LLC, said AMR was wise to file for bankruptcy while it still had about $4 billion in cash. He said the company has strong assets but needs to find labor peace and more revenue. He believes American might be pushed into a merger with US Airways.
Airlines, and other large corporations have found that constrictive labor contracts during this recession has left with financially anemic and inflexible. Unable to make salary and job cuts necessary to compensate for revenue shortfalls, American Airlines is now forced to use bankruptcy to alter labor contracts in much the same way that Delta did in 2005. Many of the airlines who have filed bankruptcy in the past ten years have also used bankruptcy to reduce their pension obligations which have created a drain on their limited resources. But these cuts won’t come automatically. Just like other creditors, employees of American Airlines will have the right to form a committee and argue for how much repayment they should receive. But it’s not likely they will receive full repayment. Just like shareholders, those holding American Airline pensions may find themselves taking home very little after debts are reorganized in this Chapter 11 bankruptcy.