So American Airlines‘ parent company AMR has filed for Chapter 11 bankruptcy protection. They’re saying "business as usual" (no real surprise there) but what does the filing really mean? There have been plenty of major airline bankruptcy filings in the past couple decades and much can be learned from them. But this one is rather different than the others and there are some interesting things that might come out of it.
Miles & Tickets
Nothing is really going to change in the operations for the near future. The points aren’t going anywhere anytime soon and neither are the flight operations. At least not on most routes. There will be some additional schedule changes in the coming months but nothing that wasn’t already likely to happen. In short, there really is nothing to worry about as a customer, at least not yet.
As for the miles specifically, I did get a chuckle out of this bit in the email from AA today:
The AAdvantage miles that you’ve earned are yours and will stay yours, subject to usual policies…
The irony here is that the "usual policies" explicitly states, "Accrued mileage credit and award tickets do not constitute property of the member." Glad they cleared up that little confusion.
Big sales and promos
The past few Chapter 11 bankruptcies that have happened in the industry were accompanied by major sales and promotions to keep customers flying in the face of uncertainty. There are many suggesting that will happen again here. I’m not so convinced. Unlike most of those recent bankruptcies this one is not a debtor-in-possession filing. That means that there isn’t a major bank along for the ride pulling the purse strings. Yes, there are still major creditors anxious and working to make sure that they will get their cash, but there is no significant investment of new money right now from a party looking to insure that new investment. Plus the $4Bn+ in liquid assets offers a decent run rate for the company. In short, no need for a fire sale so one seems unlikely.
Breaking the union
Reading the quotes from the new CEO this morning it seems clear that this move is focused on breaking the unions. Management has decided that their cost structures are too high and they’re going to attack the one bit they have a way to force change on – labor. American does have some high labor costs, partly because they still have their pensions funded, but their total costs aren’t actually that far out of whack with their competitors from what I’ve seen on recent data. So even if they do manage to renegotiate the union contracts down they’re still in a pretty tough spot. There’s only so much you can cut on the cost side if you’re not actually generating revenue.
At the same time, a work slowdown or "work-to-rule" action by the unions could cause trouble. It will be interesting to see just how quickly the contract negotiations happen and how big the cuts are. That could significantly affect the passenger experience.
What about the planes?
American just placed an order for 460 new jets, a wholesale refresh of their narrow-body fleet and then some. And much of that purchase was predicated on leasing the aircraft. Leasing companies aren’t generally keen to do business with companies in bankruptcy, though at least the new aircraft will have a high enough residual value that the leaseholders will be somewhat covered. Still, this isn’t likely to make their interest rates any better.
As for the existing fleet, the company has made it clear that they reserve the right – as is granted to them under the law – to slow payments on the existing contracts as they look at renegotiating them. Reading the bankruptcy filing, however, it is not clear exactly how many of the aircraft are tied up in leases or what that liability is. These numbers are significant, but not horrible based on a reasonable revenue model:
As of September 30, 2011, maturities of long-term debt (including sinking fund requirements) for the next five years are: remainder of 2011 – $1.1 billion, 2012 – $1.7 billion, 2013 – $1.0 billion, 2014 – $1.5 billion, and 2015 – $778 million. Future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of a year as of September 30, 2011, were: remainder of 2011 – $309 million, 2012 – $1.1 billion, 2013 – $1.0 billion, 2014 – $861 million, 2015 – $703 million, and 2016 and beyond – $6.3 billion.
There will definitely be savings that come from working some of those contracts and likely from grounding some planes, but it is hard to see that making a sufficient difference to bring the company back from the edge. There is also nearly $1Bn locked up in landing slots and routes that is mortgaged to lien-holders, something that seems unlikely to be sold off anytime soon.
Prelude to merger?
The Delta/Northwest merger was prefaced by both carriers’ bankruptcy re-orgs. The US Airways/America West was also borne out of the US bankruptcy shortly prior to that deal being announced. Is that something we could see out of this filing? There are a number of folks already suggesting that the only way for US Airways and American to survive long-term is to combine their resources.
That would be a disaster.
Yes, it worked for DL/NW. It worked in large part because they were more or less in lock-step on the way out of their bankruptcies and were moving in the same direction anyways. Plus their route networks were incredibly complimentary. The US Airways and America West route networks were complimentary, but that’s where the benefits stopped for them. The results of that merger are a labor relations nightmare. It is something of a miracle that the carrier is still managing to operate and even eke out profits from time to time given that burden.
A merged AA/US would have the existing US labor issues as well as the AA labor issues that have been slowly smoldering and which appear likely to boil over into a full-blown fiasco depending on just how bad the cuts are on the contract front. Nothing like slashing $7 billion in pensions liabilities to make your work force feel respected and happy about their future participation in the company. There is the chance that a merger between the two could be seen as American acquiring US Airways and thus the AA union – with its much larger workforce – could absorb the US union and force down the rules upon them. But even that wouldn’t necessarily solve the labor relations issues.
Some other have suggested that Alaska Airlines might be a ripe partner. Or possibly JetBlue. Sure, it is possible, but seems unlikely as neither of those – both of which are profitable for the most part – gets much value of picking up the mess rather than cherry-picking bits as desired in the future.
What’s really going to happen?
If you’ve read this far and think I actually know what I’m talking about then I guess I’ve got you fooled. I actually believe the stuff I’ve written here but I have no idea if it’ll actually play out that way or not. I do know that I’m not worried about the operations or the miles, at least not yet. The company is likely to pull through well enough and has the cash to run long enough that I’ve got no immediate concerns. And any long-term actions will almost certainly protect the AAdvantage program anyways, so even that isn’t much concern.
It certainly does seem like those pilots who retired recently en masse and cashed in on their retirement plan might’ve made a smart move. Oh, and the fact that the CEO retires and joins up with former Continental Airlines CEO Larry Kellner in a private equity company is certainly an entertaining development.
No comments:
Post a Comment