Shares of AMR, the parent company of American Airlines (AA), suffered their worst fall since September 11th 2001 this week. They slid by more than 40% on Monday on fears that America’s third-largest airline was heading for Chapter 11 bankruptcy protection. A sudden spate of pilot resignations has stoked rumours: as pensions can be renegotiated in Chapter 11, pilots are locking in their pension packages by leaving now.
What the commentators said
AMR’s problems “look chronic rather than acute”, said Liam Denning in The Wall Street Journal. It is set to finish the year with cash and short-term investments worth around $3.5bn – that’s around 15% of annual revenue. But AA “is burning cash at an accelerating rate”, said Vicki Bryan of Gimme Credit. In a downturn, it is likely to “feel the pain…more deeply” than its rivals.
That’s because, unlike its peers, it didn’t go into Chapter 11 earlier this decade. While they were in bankruptcy, they forced lower costs on their employees and managed to ditch pension commitments, emerging leaner and meaner. AA’s wage costs now comprise 28% of its revenue, compared to 17%-20% at rivals, noted Cyrus Sanati on Fortune.com. AMR insists that its “cost woes” will be fixed by overhauling its “gas-guzzling” fleet, said Sanati. But that will take years – “time America simply doesn’t have”. The best bet is to head into Chapter 11 soon and fix its “broken cost structure”. If it waits too long, it may not have enough cash to keep it ticking over during a Chapter 11 re-organisation. In that case, “it could go the way of the once iconic PanAm”.