American Airlines' Bankruptcy: Who Loses?

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Now that AMR Corporation, parent company of American Airlines and American Eagle, has filed for Chapter 11 bankruptcy protection, should you cash in your tickets and use up those frequent flier points?

No, according to Bijan Vasigh, Professor of Airline Finance at Embry-Riddle Aeronautical University in Daytona Beach, Florida. But there is other potential fallout.

“Bankruptcy is a bit of a misnomer,” he says. “This is Chapter 11, which means restructuring. During the restructuring period, the airline will have protection from the court and can reduce its cost structure in order to move out of bankruptcy.”

So travelers shouldn’t notice a difference, at least for the time being. “American Airlines and American Eagle are operating normal flight schedules today,” said the airline in a statement. Reservations, customer service and “all other operations are conducting business as usual.” The airline says it expects that to continue.

Your miles should be safe too, says Vasigh, based on the Chapter 11 experiences of other airlines. “Since airlines are competing on passenger loyalty, I don’t see much change happening.”

So who is likely to be hurt? “The whole objective of the Chapter 11 is to look at cost structures and negotiate with creditors and labor,” says Vasigh. “Some airports that are not profitable will lose services or at least frequency of services.”

American’s employees aren’t likely to be happy either. Under Chapter 11, other airlines have been able to negotiate significant concessions with labor unions.

American was unique among “legacy” airlines in the US (major carriers around since the industry was deregulated in 1978) in not having declared bankruptcy. Delta, United and US Airways all filed for Chapter 11 in the last decade. In fact, US Airways, Delta and Continental have all been through it twice. Vasigh calls Chapter 11 “very regular in the airline industry.”

“The announcement of the bankruptcy wasn’t really surprising,” concurs Jun Li, who studies the airline industry as a doctoral candidate in the Department of Operations and Information Management at the Wharton School of the University of Pennsylvania. “Mergers of other airlines [particularly Delta with Northwest and United with Continental] put American Airlines in a much worse situation than before.” AMR filed for Chapter 11 this morning in New York.

Vasigh says that this leaves Southwest Airlines as the only pre-deregulation carrier not to have declared bankruptcy, but he puts Southwest in a different category since it has always focused on low-cost operations.

Source: www.forbes.com