American Airlines Plunges Into Bankruptcy

Tony Gutierrez/AP Photo

Faced with high labor costs and rising prices for jet fuel, American Airlines parent company AMR filed today for Chapter 11 bankruptcy.

Once the world’s largest airline, American is deeply in the red, and in recent months its cash reserves have been falling. The company says labor contract rules force it to spend many millions of dollars more on operations than other airlines.

In a statement the carrier’s parent company announced plans to continue normal business operations as it seeks court protection to reduce costs and debt. American says flight schedules will be unchanged and its frequent flier program is not affected.

“The consumers, themselves, are probably not going to be affected that much; it’s going to be the employees that are really affected,” says airline analyst Denny Kelly in Fort Worth, Texas. He expects American to emerge from bankruptcy financially stronger than it is today

The nation’s third largest airline also says CEO Gerard Arpey will step down. He’s being replaced by Thomas Horton, currently the company’s president. AMR shares plunged 85 percent to just 25 cents each in trading this morning.

Flight operations may be reduced in the future. “Some of the destinations that are not very popular will be probably cut back or maybe eliminated,” says Kelly. Employee pay may be cut. “When they go in and file bankruptcy, then American can set the employee contracts anyway they want.”

American was the only major U.S. airline that didn’t seek bankruptcy protection after the 2001 terrorist attacks. Unlike most other carriers, American did not merge with a competitor, and it was the only major airline to lose money last year.

“American’s customers are always 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,” said Horton in a statement. “American serves 260 airports in more than 50 countries and territories, and we are committed to maintaining a strong presence in worldwide markets.”

The  Fort Worth,Texas-based company listed $24.7 billion in assets and $29.6 billion in debt in court papers filed today in New York.

AMR had losses of $162 million in the third quarter and $2.7 billion in the past year while the other major airlines posted profits. United Continental, the parent of United Airlines, the world’s largest carrier, had third-quarter profits of $653 million and US Airways made $76 million.

The airline had been in contract talks with unions representing its pilots, flight attendants and ground crews for more than four years.