As I suggested on October 4, American Airlines has filed for Chapter 11 bankruptcy. In its petition filed in New York, AMR reported assets of $24.72 billion and liabilities of $29.55 billion. The company has $4.1 billion in cash. They have lost about 50 billion dollars in the last decade. The bankruptcy will give the carrier the opportunity to reduces its debt levels. A chapter 11 filing allows for a reorganisation. The aim is to survive.
What does this filing mean?
Not much will change immediately. Existing ticket holders will find their tickets are honoured. Planes will still take off and land across the USA and international points. There will be, I imagine, cuts to some flights with some cities chopped but I cannot see a massive reduction in the services provided by the third largest US carrier.
Frequent flyer miles should be safe. Points earnings will still continue. It may be harder to redeem points. The risk is that if American Airlines goes, then the points will be worthless. I think the risk is low but if you wanted to play safe, you could cash your points in on one of AA’s partner airlines eg Alaska or a One World carrier such as British Airways or Qantas.
The One World alliance is safe. I cannot see AA withdrawing from the alliance especially as Qantas, Iberia and British are harmonizing schedules and services with AA. Qantas moved into Dallas to feed passengers into the AA network. Customers seem to like the opportunities to share lounges and pointes etc
American has major orders in for new planes: 260 Airbus A320s and 200 Boeing 737s. It desperately needs them to reduce the fuel costs for their aging fleet. Getting finance for these may be trickier now.
Some airports will face pressure from American to reduce their landing fees. I would be a little nervous if I was Dallas Fort -Worth which is the major AA hub. 85 per cent of all flights at DFW are operated by American.
The greatest impact will be for employees. Sadly, the hardest hit will be the Employee Pension Plans. The plans are reported to be $10 billion short of what the carrier owes. To survive, American will necd to chop billions from the pension plans. They will need to cut wages and costs for their 88 000 employees which they have been trying to do by negotiation for years. These negotiations have been in almost permanent stall. The impact of this move wont be good for morale. When I travel across the USA, I already find AA employees some of the most demoralised in the industry.
The surprise for me in the filing was the decision to replace their chief executive and Chairman Gerard Arpey with company president Tom Horton. Apey has officially retired. Not sure what the intentions are here.
Finally, American’s other option would be to seek a merger partner. As I suggested on October 14, there are few options for a merger. Merging with Delta or United-Continental would mean a huge reduction in competition. If, however, AA did not survive at all, then there would also be a major reduction in competition. Another option is US Airways which itself has high costs. Alaska is too small. Southwest and Jet Blue are out of the question although they would be interested in routes and slots. My thought is they need to go international for a merger partner which would be anathema to the US authorities currently. IAG, the owners of British and Iberia would be the logical stable.
In the last ten years, the USA has lost:
- TWA who merged with American in 2001 after 76 years of flying
- National Airlines a three year old Las Vegas based carrier disappeared in 2002
- Pan Am III which operated under the iconic name from 1998-2004
- Aloha who ceased operations in 2008 a week after going into Chapter 11 ending a 62 year history
- Northwest who merged in 2008 with Delta after 82 years of operations
- Independence Air 2006
- Delta Express which operated from 1996 to 2003 then became Song and was folded into Delta in 2006
- America West/USAir who took on US Airways name in 2007 in that merger
- MaxJet 2007 after two years of operation
- ATA (American Trans Air) in 2008 after 31 years of flying
- EOS who ceased passenger operations in 2008 after four years of flying- currently operate charters only
- Skybus who came and went in less than a year 2008
- Ted, a United low cost carier was merged back into parent company in 2008 after seven years of operations
- Midwest Airlines who became part of Frontier in 2010
- Continental who are currently merging with United
- AirTran who are currently merging with Southwest
With only one new carrier operating (Virgin America), the result has been a reduction in airline competition in the USA at the large mainline carrier end and the low cost carrier end. The country now has the big four (United, Delta, American and US) and then Alaska, Frontier, JetBlue and Southwest with the aforementioned Virgin nibbling around the edges. I can see further consolidation with one of the big four going. It means more and more airports will have fewer domestic operators for a few years.