American Lands in Bankruptcy Parent of No. 3 Airline Seeks Court Protection Amid High Fuel and Labor Costs WSJ.com Nov 30, 2011 By DOUG CAMERON, MIKE SPECTOR and JACK NICAS The parent of American Airlines filed for bankruptcy protection, an abrupt course change by one of the country's largest carriers that caps a decade of restructurings that are helping revive the long-troubled industry. The News Hub panel discusses AMR's filing for Chapter 11 protection. AMR, the parent company of American Airlines and American Eagle, has approximately $4.1 billion in cash on hand to pay creditors. AP Photo/Stephan Savoia AMR Corp. said its filing on Tuesday in New York would help it cut costs and emerge more competitive after losing more than $10 billion since 2001. The Fort Worth, Texas, company for years has resisted the type of court-protected restructuring that allowed other big carriers including United Continental Holdings Inc.'s United Airlines and Delta Air Lines Inc. to realign costs and find merger partners. AMR said its annual labor costs, including pensions, are about $800 million more than rivals, a figure unions dispute. Its financial woes have grown in recent months as contract talks with its pilots fizzled and fuel prices rose. AMR's longtime Chairman and Chief Executive Gerard J. Arpey, who had for years tried to stave off bankruptcy, opted to retire and join an investment group despite the board's request that he stay. The board appointed AMR President Thomas Horton, age 50, to succeed him. In an interview, Mr. Horton said the cost gap with rivals "was widening" for a variety of reasons "and we didn't see a clear line of sight in closing it." Enlarge Image Close The move sent AMR shares down 84% to 26 cents each in 4 p.m. trading on the New York Stock Exchange, capping a 12-month period in which the company's stock price already had fallen by nearly 80%. It also set off a scramble by creditors owed some $29.6 billion, according to its bankruptcy petition, and raises uncertainty over how its multibillion dollar pension obligations will be handled. After the filing, the Federal Aviation Administration said it would step up safety inspections of American planes and enhance oversight of its pilot training and other personnel practices. Analysts viewed AMR's filing as broadly positive for the airline industry, in part because American is expected to reduce excess capacity that has led to unprofitable routes. "Assuming a successful reorganization, we would envision a smaller AMR with a cost structure that could stand profitably next to its peers," said J.P. Morgan Chase & Co. analyst Jamie Baker. But he said AMR's 15-month target for completing its restructuring could be difficult to achieve. Lost Altitude See stock quotes and some key dates for the airline since 2002. View Interactive Flights and Tickets FAQ Document See an American Airlines document about flights and tickets. View Document AAdvantage FAQ Document See an American Airlines document about the airline's AAdvantage program. View Document More photos and interactive graphics Journal Community More AMR Filing Puts Pension Benefits at Risk AMR Stock Halts Revive Circuit-Breaker Debate New CEO in the Spotlight FAA to Step Up Safety Inspection of American Heard on the Street: Evasive Action GE: No Big Loss From Filing Deal Journal: Analysts React What the Filing Means for Travelers SmartMoney: Upside to Woes Deal Journal: Biggest Bankruptcies AMR Statement on Filing Flights and Tickets FAQ The carrier's move could trigger industry consolidation, with US Airways Group Inc., the product of an earlier merger, seen by analysts as a potential fit. But any attempted merger would unleash huge integration issues, further upset labor groups and face antitrust concerns. AMR is third among U.S. and global airline companies by traffic, behind United Continental and Delta. The company, which has roughly $25 billion in assets, made a bankruptcy filing that ranks as the 24thlargest since 1980, according to BankruptcyData.com, and the second-largest airline bankruptcy behind United Airlines parent UAL. The airline enters bankruptcy protection with more than $4 billion in cash on hand, a decision that surprised some industry observers but drew praise from bankruptcy experts, who said troubled companies often wait too long to file. They also said AMR will likely benefit from the experience of its competitors in bankruptcy. AMR's filing appears to have been "very well planned," said Eric Schaffer, a partner in Reed Smith's bankruptcy practice who has worked on past airline restructurings. Scott McCartney on Lunch Break discusses whether Tuesday's bankruptcy filing by American Airlines parent AMR will impact scheduled flights, frequent flier miles and reservations. Labor groups that have long been at odds with management will now have to vie with bondholders, leasing firms and others for position on the creditors' committee during the bankruptcy process, with the panel ultimately appointed by a Justice Department representative. One airline-industry expert said the filing isn't likely to end the battle with unions, which will fight management efforts to curb wages, benefits and pensions. "This is an ugly scene coming for American," he said. Dave Bates, president of the Allied Pilots Association, which represents some 10,000 AMR pilots, said the union "has been diligently preparing" for Chapter 11, lining up bankruptcy experts and discussing past airline bankruptcies with other union leaders. Several other unions representing dispatchers, baggage handlers and other workers have existing deals with AMR or were negotiating new ones. Unlike many other companies that have sought bankruptcy protection in recent years, AMR didn't file for Chapter 11 with a reorganization plan in place supported by creditors. Instead, AMR must develop its plan during bankruptcy proceedings. AMR executives became concerned in late summer about third-quarter earnings and considered a possible bankruptcy filing more seriously. Anxiety mounted as a hoped-for labor deal with its pilots failed to materialize and its share price sank. The company reported a $162 million third-quarter loss in late October, and pledged to restore profitability mainly by negotiating more cost-efficient labor contracts. Soon after, AMR started reaching out to restructuring bankers at Rothschild and bankruptcy lawyers at Weil, Gotshal & Manges LLP, said a person familiar with the matter. On Nov. 15 and 16, AMR's board convened for half-day meetings in Fort Worth, the person said. Mr. Arpey and other top executives briefed directors on their plans to avoid bankruptcy, but also discussed a possible filing. Mr. Arpey still favored avoiding bankruptcy along with other executives but felt a filing could be necessary. The meetings came as AMR's pilots' union rejected a proposal for a new labor contract. AMR directors feared the company might not realize cost savings before a liquidity crisis brewed next year. The company has significant debt payments in 2012, and directors worried fuel costs could spike and the U.S.'s current economic malaise could worsen. AMR had pledged nearly all its assets as collateral for debt, making it difficult to borrow more money. WSJ's Liam Denning stops on Mean Street to discuss AMR's bankruptcy filing and how it impacts the airline industry. After the meetings, directors asked bankers and lawyers to prepare detailed presentations on an AMR bankruptcy filing: the effect on employees and relationships with unions and what steps could be taken under bankruptcy protection to better the company's finances. Directors also wanted to hear how their bankruptcy case might compare with past proceedings involving United Airlines, Delta and other competitors. AMR's board reconvened Monday morning in New York. In the end, directors decided they had run out of restructuring options. The board authorized AMR's bankruptcy filing Monday night. Tom Roberts, an attorney for AMR, said the airline's cash position was key to the timing of the bankruptcy filing. "Cash is critical to a successful restructuring in bankruptcy," he said. "Problem is, if we waited any longer, we may have adversely affected our ability to successfully restructure this company." Mr. Arpey, who joined American Airlines as a financial analyst in 1982 and was named CEO in 2003, had opposed bankruptcy for years. But in an Oct. 19 call with investors he acknowledged its benefits, saying that bankruptcy "has not been our preference, or our goal," but that "we are well aware of the fact that all of our legacy competitors have used Chapter 11 to reduce their labor costs." As the board moved toward bankruptcy, Mr. Arpey didn't stand in the way of the board and others evaluating all information related to the company's financial position, the person familiar with the situation said. Mr. Arpey was exhausted from ongoing efforts to restructure AMR, and felt he needed to step aside if the company ultimately pursued a bankruptcy-protection filing, since it represented something he had devoted his career and reputation to avoiding, this person said. Mr. Arpey became more resigned to a bankruptcy filing as November wore on. AMR said Tuesday the board had asked Mr. Arpey to stay but understood his decision to resign. There weren't any indications Mr. Arpey was forced out, the person said. Mr. Arpey, age 53, couldn't immediately be reached for comment. In a letter to AMR staff on Tuesday, he said he "respect[s]" the board's decision but concluded that remaining in his roles "would not be best for the company." He said the restructuring will require "not only a reevaluation of every aspect of our business," but a chairman and CEO "who will bring restructuring experience and a different perspective to the process." What the Filing Means for Travelers SmartMoney: The Upside to AMR's Woes Timeline: AMR AMR Statement on Filing —Joann S. Lublin, Marie Beaudette, Joseph Checkler and Andy Pasztor contributed to this article. Write to Doug Cameron at doug.cameron@dowjones.com and Mike Spector at mike.spector@wsj.com Copyright 2011 Dow Jones & Company, Inc. 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