American Airlines Parent Files for Bankruptcy

November 29, 2011, 7:23 am

American Airlines Parent Files for Bankruptcy

The parent company of American Airlines said on Tuesday that it has filed for bankruptcy protection, in an effort to reduce labor costs and shed its heavy debt load.

American’s parent, the AMR Corporation, was the last major airline in the United States to resist filing for Chapter 11 in an effort to shed contracts, a move that analysts said left it less nimble than many of its competitors.

AMR intends to operate normally throughout the bankruptcy process, as previous airlines have done. The company doesn’t expect the restructuring to affect flights or frequent flier programs.

“Our board decided that it was necessary to take this step now to restore the company’s profitability, operating flexibility, and financial strength,” Thomas Horton, the company’s chairman and chief executive, said in a statement. Mr. Horton, formerly the company’s president, is replacing Gerald Arpey, who is retiring.

One of AMR’s chief goals in bankruptcy will be to lower its labor costs.

The company had been negotiating new contracts with its unions, talks that had stalled earlier this month when its pilots union refused to send a proposal to its members for a vote. Because federal bankruptcy rules allow companies to reject contracts, AMR may take a harder negotiating stance with its unions.

“Achieving the competitive cost structure we need remains a key imperative in this process and, as one part of that, we plan to initiate further negotiations with all of our unions to reduce our labor costs to competitive levels,” said Mr. Horton.

Long the nation’s biggest airline, AMR began to lose ground in recent years as low-cost carriers like Southwest Airlines grew in prominence. Major airlines were forced to respond by cutting fares.

As competition intensified, AMR responded by borrowing more and more, eventually pledging nearly all of its assets and leaving it heavily indebted. It also sought to reduce expenses, having cut $4.1 billion by the end of 2004.

But its principal competitors, including Delta Air Lines and the UAL Corporation’s United Airlines, filed for bankruptcy, shedding billions of dollars in costs and renegotiating labor contracts.

Both also sought mergers to gain scale, with Delta pairing off with Northwest and United with Continental. Such deals allowed those airlines to become profitable again.

“Since their restructurings in chapter 11, AMR’s major network competitors all have lower costs than AMR,” Isabella D. Goren, the company’s chief financial officer, wrote in a court filing.

AMR has posted annual losses three years in a row, including a $471 million loss last year. It has lost $982 million through the first nine months of this year.

Speculation about an AMR bankruptcy filing started to mount this year, spooking investors. The company’s stock has dropped 79 percent in 2011.

As of Sept. 30, AMR had $24.7 billion in assets and $29.6 billion in debt, according to a filing with the federal bankruptcy court in Manhattan. The company added that it has about $4.1 billion in cash and short-term investments that it can use to pay off vendors and suppliers.

The airlines largest unsecured creditors include the Wilmington Trust and Manufacturers and Trust Company, which represent several classes of bonds. The company is being advised by the investment bank Rothschild and the law firms Weil, Gotshal & Manges, Paul Hastings, Debevoise & Plipton and the Groom Law Group.