November 29, 2011 / 12:23 PM / in 6 years

American Airlines files for bankruptcy

(Reuters) - American Airlines, the third-largest U.S. carrier, and its parent AMR Corp filed for bankruptcy protection on Tuesday to cut labor costs in the face of high fuel prices and dampened travel demand.

AMR, which replaced its chief executive in the move, had been mired for years in fruitless union negotiations, complaining all the while that it shoulders higher labor costs than rival domestic and foreign carriers that have already restructured in bankruptcy.

American Airlines, once the largest U.S. carrier, is now third behind United Continental Holdings Inc’s United Airlines and Delta Air Lines Inc, both of which used Chapter 11 to cut costs and later found merger partners.

“The world changed around us,” incoming Chief Executive Tom Horton told reporters on a conference call.

“It became increasingly clear that the cost gap between us and our competitors was untenable,” he said.

AMR named Horton as chairman and chief executive, replacing Gerard Arpey, who retired.

The airline said it and its regional affiliate American Eagle would continue to operate as usual, fly their normal schedules, honor reservations and make exchanges and refunds.

American Airlines hopes bankruptcy will cut labor costs, but analysts question whether restructuring under Chapter 11 of U.S. Bankruptcy Code will address operational shortcomings and bolster revenue.

“Bankruptcy is not necessarily the be-all, end-all,” said Helane Becker, an analyst with Dahlman Rose & Co. “They’ve got more problems to address in addition to the cost problem.”

She said the airline industry has been hit by high fuel and labor costs, but filing for bankruptcy would not solve AMR’s problems, and the airline needed to rework its operations and boost revenue.

Shares of AMR, whose passenger planes average 3,000 daily U.S. departures, had slid 45 percent from the end of September through Monday. On Tuesday the shares tumbled 79 percent to 34 cents on the New York Stock Exchange. Stock in bankrupt companies typically is wiped out when a company exits Chapter 11 and new shares are issued, making the old shares worthless.

Shares of rival airlines rallied on expectations that fares could rise, as AMR kept a lid on industrywide fares in its effort to keep its airplanes full.

United Continental shares jumped 6.2 percent to $17.60, while US Airways Group Inc climbed 4.7 percent to $4.47 and Delta Air Lines rose 4.2 percent to $7.74.

SLIMMED-DOWN AMR

Under its Chapter 11 bankruptcy filing in a New York court, the company listed assets of $24.72 billion and liabilities of $29.55 billion. The company has $4.1 billion in cash.

AMR’s top rivals, UAL and Delta, used bankruptcy protection to slash costs and have since bought out other airlines: Delta bought Northwest Airlines, and UAL bought Continental Airlines to form United Continental Holdings.

US Airways and United Airlines sought relief under Chapter 11 bankruptcy in 2002. Delta and Northwest filed in September 2005. Japan Airlines Co Ltd, one of American Airlines’ alliance partners, filed for bankruptcy last year.

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