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American Airlines parent flies into Ch. 11

by Jamie Mason | Published November 29, 2011 at 11:04 AM

AMR Corp., the parent of American Airlines Inc., landed in bankruptcy Tuesday, Nov. 29, hoping to leave in its wake a third-quarter loss, debt troubles, spiraling fuel costs and increasing competition.

The third-largest U.S. carrier, AMR will attempt to reorganize with the help of $4.1 billion in cash that it has on hand.

The Fort Worth-based airline company filed for bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan with 19 affiliates. AMR wants the cases jointly administered.

American Airlines is a major U.S. certificated passenger airline and freight carrier providing service to 160 destinations in North America, the Caribbean, Latin America, Europe and Asia.

AMR subsidiary AMR Eagle Holding Corp., which was also included in the bankruptcy filing, owns two regional airlines that do business as American Eagle.

AMR blamed its Chapter 11 filing on a lagging financial performance since 2009, which has left it behind its major network rivals, many of which restructured and emerged from bankruptcy before 2009. AMR is the only major airline that has not sought Chapter 11 protection previously.

United Airlines Inc. exited from bankruptcy protection in 2006. US Airways Group Inc. emerged from its second Chapter 11 filing in 2005 and Delta Air Lines Inc. emerged from Chapter 11 in 2007.

Despite cutting costs by $4.1 billion by the end of 2004, AMR has the highest operating costs today compared to United, Delta and US Airways, court filings said.

According to court filings, the Airline Deregulation Act of 1978 transformed the U.S. airline industry from "an era of economic regulation to an era of intense competition." Competition has increased due to Internet-based marketing and reservation systems, which resulted in a price transparency to the consumer.

AMR has been hurt further by the uncertain economic outlook, volatile fuel prices, its uncompetitive cost structure and diminishing financial condition, which has been the subject of industry analyst reports and the cause of speculation about a possible bankruptcy filing.

"This was a difficult decision, but it is the necessary and right path for us to take -- and take now -- to become a more efficient, financially stronger, and competitive airline," AMR chairman, chief executive and president Thomas W. Horton said in a company statement.

"As we have made clear with increasing urgency in recent weeks, we must address our cost structure, including labor costs, to enable us to capitalize on these foundational strengths and secure our future," Horton said in the statement. "Achieving the competitive cost structure we need remains a key imperative in this process and, as one part of that, we plan to initiate further negotiations with all of our unions to reduce our labor costs to competitive levels."

The company had a $162 million net loss in the third quarter of 2011, compared to net income of $143 million in the third quarter of 2010. It has $4.1 billion in unrestricted cash and short-term investments.

AMR has seen its stock decline from $7.92 per share at the beginning of 2011 to $1.61 per share on Nov. 23. Its stock closed at $1.62 on Monday.

The debtor owes $10.9 billion in debt, which consists of $4.6 billion in secured variable and fixed rate debt maturing through 2023. The interest rates vary from 1% to 13% on the debt.

AMR also owes $2 billion on enhanced equipment trust certificates with maturities through 2021 and interest rates from 5.1% to 12% per annum, and $1.6 billion on revenue bonds maturing through 2036 with interest rates from 6% to 8.5%.

AMR has $1 billion outstanding on 7.5% senior secured notes due 2016 with U.S. Bank NA as the trustee and Wilmington Trust Co. as the collateral trustee. The company also has $460 million in 6.25% senior unsecured convertible notes due 2014. Wilmington Trust is the trustee on the unsecured notes as well.

In addition, AMR owes $214 million in 9% to 10.2% debentures due 2021 and $173 million in 7.88% to 10.55% notes due 2039.

The company has 88,000 employees, the majority of which are unionized and subject to collective bargaining agreements. AMR, which has been in negotiations with its pilots over a new CBA for the past six years, also has high labor-related costs, court documents said.

Judge Sean H. Lane has been assigned to the case.

AMR is 12.4% owned by Primecap Management Co., 9.3% owned by Capital Global Research Investors, 8.4% owned by Capital World Investors and 7% owned by Asia Mountain Investment Co. Ltd.

American Airlines was founded in 1934. As of Nov. 1, the airline had a fleet of more than 600 jet aircraft and provided 1,800 daily departures to its 160 destinations. American Eagle has a fleet of 300 aircraft and provides 1,500 daily departures to over 175 destinations in North America, Mexico and the Caribbean.

AMR listed its assets at $24.7 billion and its liabilities at $29.55 billion in its petition.

Its largest unsecured creditors include Hewlett-Packard Co. of Palo Alto, Calif. ($30.86 million), Miami Dade County of Miami ($25 million), Rolls-Royce Inc. of Reston, Va. ($27 million), Boeing Commercial Airlines of Chicago ($15.3 million) and Honeywell International Inc. of Morristown, N.J. ($7.6 million).

AMR's lead corporate counsel is Tom Roberts at Weil, Gotshal & Manges LLP and its lead bankruptcy counsel is Harvey Miller at the same firm.

Stephen Karotkin, Alfredo R. Pérez and Stephen A. Youngman at Weil Gotshal are also debtor counsel.

Its financial adviser is Rothschild.

-- Lou Whiteman contributed to this report.

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