The Deal magazine: You think a near-term filing is inevitable. Why?
Robert Herbst: American is going through a transition. The airline has historically had high costs, but they also had a revenue premium that helped offset those costs. They in the past were the premium airline for the premium customer, but on the revenue side they have lost that edge they had. And meanwhile, on the cost side, as the only major carrier not to file for bankruptcy, they are so out of line and so uncompetitive that the only thing they can do is burn cash.
There is right now a $2 billion differential between the profitability of AMR and rivals United and Delta. To say there is no option other than bankruptcy is incorrect, but I don't see any workable solution for the company.
Bankruptcy could be a tremendous positive for American. Unlike their competitors, who erased pension liabilities through the courts, American has about $8 billion in obligations. That is murderous for the balance sheet, and there is no way to get out from under that other than bankruptcy. Going through bankruptcy would also allow them to get out of or rework leases on older, less efficient aircraft and improve work rules to gain greater productivity. The bottom line is American has a lot of leftover legacy costs that its rivals don't have because the rivals went through bankruptcy.
Analysts say that with American's huge cash balance, the company has time to work out its issues. Why should it consider a filing with more than $4 billion in the bank?
In 2005 Northwest Airlines Corp. filed for bankruptcy when its unrestricted cash fell to about 18% of trailing 12-month revenues. That is just about exactly where American stands right now. They need to file soon and begin to conserve their cash if they are going to be able to control their destiny in Chapter 11, and not rely on debtor-in-possession financing. Cash management is even more important in this climate and with these credit markets than it was in 2005 because it is going to be very tough for the company to get reasonable terms on a DIP loan in this environment.
What could make you change your mind about the inevitability of a bankruptcy filing? There are rumors of a new pilot deal. If that happened, would you reconsider?
The truth is American has buried itself in a very deep hole. The current pilot contract is probably the most aligned of all work groups with the rest of the network carriers. So even if they get an agreement with the pilots, their overall labor costs would still be way out of line compared to other airlines, and there is a lot of anger out there from other work groups, so deals will not be easy to come by.
The only thing I can see that would save American from a bankruptcy would be if all the labor groups came together quickly with management and said they were all going to work together, but it doesn't appear that is going to happen.
AMR and its employees are proud of the airline's position as the only pre-deregulation airline not to spend time in Chapter 11. Was it a mistake for the company not to file for bankruptcy in the mid-2000s when Delta, Northwest, United and US Airways Group Inc. all reorganized?
I think avoiding bankruptcy at that point was the right thing to do. Truth is the airline has had multiple opportunities to make a course change and avoid getting into this situation, but unfortunately they did not manage to do so. After the attacks of 2001 when the industry came under pressure, labor and management came together, and all sides were ready to fight for the company and do what was needed. It worked for a while, but then there was a series of incidents where management was asking for concessions while hiding executive bonuses that destroyed the relationships and set up this trouble.
AMR's management has come under a lot of criticism from labor and investors. How much blame do you place on management for the airline's troubles?
I do believe American has some of the best finance people in the industry, but they are very detached. They have lost the confidence of labor, and I think Wall Street has shown from the stock price that it does not have much confidence in them either. They should be out in front talking to employees, and on CNBC on those days earlier in the month when the stock collapsed. But those things never happened.
I don't see any possible way the current management can lead American out of this without a filing.
Labor leaders complained the filings in the mid-2000s created a downward spiral, with each airline that entered bankruptcy trying to get costs below the last one that had emerged. Would an American filing today start a new cycle and further destabilize the industry?
I see the American bankruptcy being more about catching up than it is getting ahead. If American could tackle the difference in productivity between it and Delta and just get its work policies to be competitive with other airlines, that is a $1.5 billion to $2 billion annual difference. This is not the beginning of another round of airline bankruptcies.
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