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American Airlines bankruptcy unlikely to disrupt fliers

AMR Corp., the parent to American and American Eagle, filed for Chapter 11 reorganization in federal bankruptcy court in New York to restructure the company’s debt and costs. The airlines, which flew a combined 9 million passengers in October, said flight schedules and reservations would operate as usual.

“This is 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,” said Thomas Horton, the new chief executive of AMR, which employs 88,000 people. “Near term it will be business as usual. This is a well worn path in the industry so I think most customers understand that.”

Delta, United, Continental and US Airways all have gone through Chapter 11 reorganizations. American has about $4.1 billion in cash on hand to pay for goods and services while the company goes through the process.

American and American Eagle assured customers they would:

• Fly normal schedules with 3,300 daily flights.

• Honor tickets and reservations.

• Fully maintain the AAdvantage program for its 67 million frequent fliers, with miles remaining intact.

•Continue Admirals Club amenities for eligible customers.

•Provide employee wages and health benefits without interruption.

AMR reported losing $471 million on about $22 billion in revenue in 2010, after losing nearly $1.5 billion the year before and $2.1 billion in 2008.

As expectations for an American bankruptcy grew, investors fled. The price of AMR shares declined from $7.92 at the start of the year to $1.61 on Nov. 23. Coinciding with the reorganization, Gerard Arpey retired as chief executive of the company. Horton has worked at the company for 22 years.

“Throughout the restructuring process, as always, our customers remain our top priority and they can continue to depend on us for the safe, reliable travel and high quality service they know and expect from us,” Horton said.

Andrew Thomas, assistant professor of international business at the University of Akron and author of Soft Landing: Airline Industry Strategy, Service, and Safety, agreed with Horton that customers should see few changes in the short term. The real changes, he said, will occur when American begins to emerge from bankruptcy.

“The examples from the other carriers provide insight,” he said. “When the lawyers, judges, politicians, and lobbyists get done with it, AA will likely be a very different airline, especially regarding markets served — or not served.”

Over time, he said he expects the quality of service on American to deteriorate as older, higher-paid employees are replaced with lower-paid workers “whose levels of service and quality are often inferior.”

Other experts made more positive predictions.

Other airlines have emerged from bankruptcy with very little impact on consumers and, in fact, those airlines gained a competitive advantage by making mostly internal changes, said Joshua Schank, president and CEO of the Eno Transportation Foundation, a non-partisan think tank.

“There are a lot of efficiencies they can gain from bankruptcy,” he said.

Schank said he could see American reviewing its smaller hubs, but added that should not affect many people because “the chances are the places they are going to reduce are not the places where demand is high.”

Darryl Jenkins, chairman of the American Aviation Institute, believes the bankruptcy could make American a better airline for consumers.

“Over time, what you want as a consumer, you want a viable airline with good reliable service, and an airline can’t do that if it’s losing billions of dollars,” Jenkins said.

The bankruptcy was not unexpected, and all of American’s key competitors have used bankruptcy as a way to run more efficiently, said Henry Harteveldt, a travel industry analyst and co-founder of Atmosphere Research Group.

“If American does things as I expect them to do, in a very thorough and very deliberate and very carefuly crafted manner, it will emerge as a much more efficient airline,” Harteveldt said.

But improvements are needed in the areas of flight entertainment options and premium seating offered by competitors, as well as in the area of relations between labor and management, Harteveldt added.

Seth Kaplan, managing partner at Airline Weekly, a publication that covers the industry, said he expects that flights from hubs in Dallas and Miami will be safe, but that low-cost competitors in Los Angeles and dominant United in Chicago could convince American to reduce its presence in those cities.

“They will cut airplanes, routes, people almost certainly,” Kaplan said. “It’s just a question of how much and where.”

But Kaplan said frequent-flier miles should be safe, and perhaps even benefit from more generous offers American could make to keep its loyal customers.

“If anything, American is now going to be offering mileage bonuses to assure them that they’ll keep flying,” Kaplan said.

Texas Sen. Kay Bailey Hutchison, the top Republican on the Senate transportation committee, expressed disappointment with the Fort Worth company’s decision. She defended Arpey for trying to avoid bankruptcy and said “he did everything possible to avoid this outcome.”

“I remain concerned about the company’s pension plan — one of the most generous in the industry — being placed in jeopardy by this unfortunate turn of events,” Hutchison said.

Dave Bates, president of Allied Pilots Association, a union representing 8,000 American pilots, said the bankruptcy filing is disappointing, if not entirely unexpected, because unions reached agreements on labor savings with the company in 2003.

He anticipated “significant changes” to the company’s business and to the union’s contract during the estimated 18 months it will take to complete the reorganization.

“While today’s news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way,” Bates said. “We agreed to sacrifice based on the expectation that our airline would regain its leadership position. What has transpired since has been nothing short of a ‘perfect storm.’ “

American Professional Flight Attendants President Laura Glading said workers already “sacrificed greatly” in reducing the company’s labor costs in 2003 and expect to participate in the reorganization.

“We absolutely want to be at the table and help steer the discussion,” said Glading, whose union represents 17,000 American flight attendants. “We see a path forward and we’re going to be part of that path forward.”

AMR had assets of about $24.7 billion and liabilities of $29.6 billion on Sept. 30. The company blamed volatile fuel prices, economic uncertainty for customers buying tickets and competitive disadvantages for its financial difficulties.

After Sept. 11, 2001, airlines faced problems with fuel costs and security, along with a significant decline in air travel. US Airways and United filed for Chapter 11 in 2002 and Delta and Northwest filed in 2005.

“The last decade in the airline industry was incredibly difficult,” Horton said. “All of our competitors went down this track, in fact some more than once. And as a consequence they reduced their costs and debt and became more competitive.

“All of the people of American worked very hard and honorably to win without taking that track but now’s the time to turn the page and go out and make the company competitive.”

Isabella Goren, AMR’s chief financial officer, filed an affidavit citing increased competition and Internet-based shopping that made “comparison shopping for the lowest fare extremely easy.”

AMR cut costs, said that as competitors emerged from bankruptcy more competitive, American found it difficult to keep up.

“AMR long ago learned, through bitter experience, that if it does not match competitors’ fares on a route, it will lose customers to the lower priced carrier,” Goren said in her affidavit.

Bryan Saltzburg, general manager of TripAdvisor Flights, said he does not expect fliers to see dramatic changes to American’s routes or number of flights. But he said that unlike its competitors, American may not be able to invest in their improvements to its customers’ “in-flight experience.”

Still, he said, “while it’s certainly a painful step for a proud airline and its employees, bankruptcy protection could potentially allow American to restructure and emerge as a stronger competitor in the end.”

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