American Airlines parent company AMR (NYS: AMR) filed for Chapter 11 bankruptcy protection this morning after struggling to overcome high labor costs and jet fuel prices.
AMR was the only major U.S. carrier that managed to avoid bankruptcy in the past decade, as rivals United Air Lines and Delta Air Lines (NYS: DAL) filed for bankruptcy protection in 2002 and 2005, respectively. These moves by United and Delta allowed the companies to slash costs and restructure their labor agreements, which gave them huge cost savings over AMR -- which is the only major airline still funding worker pensions.
Also putting AMR at a competitive disadvantage was consolidation in the airline industry, with United and Continental combining to form United Continental Holdings (NYS: UAL) , and Delta and Northwest merging as well. Increased competition from low-cost carriers Southwest (NYS: LUV) and JetBlue (NAS: JBLU) has also put further pricing pressure on AMR.
AMR's cost disadvantage clearly showed in the company's bottom line over the past few years, as AMR was the only major airline in the red in 2010 and looked to be headed toward another loss this year.
The company did say that it expects to have enough cash -- about $4.1 billion in unrestricted cash and short-term investments -- to pay vendors, suppliers, and other business partners during the Chapter 11 process. AMR will still fly its normal schedules for now and honor all tickets and reservations.
AMR also had a major shakeup at the top of the company, announcing that Chairman and CEO Gerard Arpey will be retiring and replaced by Thomas Horton, who knows the company well. He joined AMR in 1985 and has held numerous senior positions at the company, the most recent being president of AMR and American Airlines since July 2010. Horton also served as AT&T's CFO from 2002 to 2006.
Foolish bottom line
This was a difficult step for AMR to take, but I believe it was necessary after the company failed to reach a cost-cutting deal with its pilots earlier this month. Obviously, AMR is bleeding money, and it needs to make drastic changes to compete with the other major airlines and become profitable again. We'll be watching closely as more details emerge of AMR's bankruptcy plan and strategy for its post-bankruptcy future.
Finally, don't even think about putting any money in AMR right now. Shares are likely to be canceled (i.e., become worthless) during the bankruptcy process. If or when AMR emerges from bankruptcy, these shares will almost certainly still be worthless. This is one hot potato you don't want to be left holding.
To stay updated on all developments with AMR and the rest of these airlines, add them to your Watchlist:
- Add United Continental Holdings to My Watchlist.
- Add Southwest Airlines to My Watchlist.
- Add JetBlue Airways to My Watchlist.
- Add Delta Air Lines to My Watchlist.
- Add AMR to My Watchlist.
At the time this article was published Brendan Byrnes owns no shares in any company mentioned above. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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