How the American Airlines Bankruptcy Will Affect You

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How the American Airlines Bankruptcy Will Affect YouAt its best, holiday flying is a harrowing experience, with higher than usual odds of delayed departures, brutal weather, getting bumped, overcrowded terminals, lost luggage and stressed-out agents. On Tuesday, American Airlines' customers got another thing to worry about as its parent company, AMR Corporation (AMR), announced it had filed for Chapter 11 bankruptcy protection. As one of America's largest airlines prepares to massively restructure itself, will its customers be left at the gate?

In the short term, the answer is no. According to its website, American -- and its subsidiary, American Eagle -- "expect to continue" their flight schedules, honor all their tickets, and maintain all of their customer service programs. In particular, American said that it plans to "fully maintain" its frequent flier, American Airlines miles and "Admiral's Club" offerings.

The airline's phrasing leaves a lot to be desired -- after all, "expect to continue" is far from an iron clad promise -- but in all likelihood, American will go on with business as usual. As part of its filing, the company reported cash reserves of $4.1 billion, which it will likely use to continue operations while it goes through restructuring. And even if American folds, most customers who bought their tickets with credit cards will likely receive refunds.

Perhaps the most optimistic indicator for fliers is American's emphasis on customer service as it begins the bankruptcy process. In the airline industry, customer loyalty is a precious commodity, and American doesn't want to lose any fans in what is -- according to most analysts -- a fairly routine business move in the airline industry. In previous bankruptcies and mergers, the companies that bought failed airlines generally went to great lengths to maintain their relationships with the failed fliers' customers. In the case of Eastern, TWA and Pan Am, this included honoring the failed carriers' frequent flier miles.

Business as Usual

In the past 10 years, almost all of the country's major airlines have declared bankruptcy. Until Tuesday, the only exceptions were American and Southwest (LUV). Now, of course, Southwest stands alone, due in no small part to the fact that it's a bargain airline that has long prided itself on its low overhead, and its clever deals in hedging its jet fuel purchases.

This isn't to say that nobody will be affected by Tuesday's filing. AMR's investors got a nasty little shock after the announcement, as the company's stock price slid from a close of $1.62 per share on Monday to $0.23 on Tuesday morning. Over a longer timetable, AMR stockholders have had an even worse year: In January, the stock was trading at $8.85.

If the bankruptcies of Delta (DAL) and United (UAUA) are any indication, American's decision to file Chapter 11 will also hit the company's employees fairly hard. Although the airline's union members negotiated to help American cut $4.1 billion in annual expenses, chances are that Tuesday's move will lead to new contracts for even less money. The bankruptcy may also affect customers in out-of-the-way locations, as American may cut less-profitable routes.

For the short term, however, American's passengers can likely look forward to blue skies ... as long as they don't own its stock.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.




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