American Airlines files its anticipated filing for Chapter 11 bankruptcy this morning, ending its attempt to be the only legacy carrier to avoid a filing in the wake of 9/11/01. While the carrier made a valiant effort to compete without restructuring, it became inevitable with mounting losses and the need to re-fleet. Information on AA’s bankruptcy filing can be found here.
Of course, American placed orders with Boeing and Airbus for a large fleet of new single aisle aircraft, all of which will now be subject to the bankruptcy process. We expect that these orders will be upheld and approved, as American’s aging fleet of MD-80 and 757 aircraft are not fuel efficient and rapidly reaching the point of economic obsolescence.
American also has a Boeing 787 on order contingent upon reaching a satisfactory agreement with its pilots. In bankruptcy, however, carriers can impose terms for its labor agreements, so pilots will likely be forced to accept concessions that they would not have willingly accepted in negotiations. This will, however, clear the way for the 787 order to also be confirmed.
The restructuring of American’s debt is long overdue, and while American was able to avoid a Chapter 11 filing in the wake of 9-11, it found its competitors leaner and more agile with their restructured balance sheets in a perishable commodity industry in which the low cost producer will inevitably win, resulting in massive losses for an uncompetitive American with a higher cost structure. At the same time, American’s long history of industry innovation dried up — American was the first with computer reservations (Sabre), yield management, the first to introduce “super saver” fares, and the first to introduce a frequent flyer program. But there hasn’t been much creativity to speak of coming out of American’s headquarters over the last decade.
Like the other legacy carriers, American will survive Chapter 11, but shareholders and debt holders will pay the price. It will be interesting to see how quickly the pre-planned reorganization proceeds, and how the Airbus and Boeing orders, which were structured with the bankruptcy in mind, survive the restructuring.
For those carriers salivating at potential neo and Max delivery positions, don’t hold your breath, as American has an extremely high likelihood of taking those airplanes.