Should American Airlines Preemptively File for Bankruptcy?

Writing in Forbes, Richard Lehmann thinks so. It’s hard to disagree (link is free now; may require subscription later):

American Airlines should be praying hard, since only an act of God can now save their company from an eventual bankruptcy filing. The bankruptcies by Delta Air Lines and Northwest Airlines on Sept. 14 were close enough to Sept. 11 to revive memories of its impact on the airline industry. More importantly, it leaves American as the only legacy carrier that has not resorted to a court ordered restructuring.

….. I have learned a few things about when bankruptcy becomes both inevitable and even desirable. AMR (American Airlines’ parent company) has reached that point. One need only look back at history to see why this is so.

….. (Legendary management guru) Peter Drucker, in his writings on management, pointed out that all industries had one–or more–of three common structural weaknesses. They were either labor intensive, capital intensive or vulnerable to the cost and supply of a key commodity. Airlines are in the unhappy situation of having all three weaknesses. With deregulation, legacy carriers found themselves with labor costs, work rules and cost structures that could not compete against new upstarts.

….. AMR, like its peers, used the threat of bankruptcy to extract wage concessions and work-rule changes from its employees–changes that would have allowed it to become more efficient and enable it to trim back unprofitable routes. This did not, however, relieve it of employee seniority costs (i.e. the higher wages earned by its more senior “last to go” employees and their higher pension costs)–costs, which an upstart carrier doesn’t have. But even after squeezing its labor force, AMR is still left with billions in debt from the hundreds of aircraft it does not want and the expensive airport gates that are being under-utilized. Only through bankruptcy can they quickly reduce this large and costly accumulated debt.

….. Yes, AMR can survive out of bankruptcy for another year or two, but it would be a pointless exercise. Its shareholders have no future, and with its current debt load, profitability is not on the horizon. With the latest bankruptcy filings, they become the only carrier left without the competitive advantage of a lean balance sheet and a lower cost bankruptcy or post-bankruptcy environment. In short, bankruptcy gives Delta and Northwest an immediate competitive advantage over AMR and, thus, only quickens the inevitable.

AMR should go for a prepackaged bankruptcy by stopping all debt payments now. It should set a negotiating deadline and offer to pay all legal fees–with incentives for all of the attorneys–if the deadline is met.

….. With the Delta and Northwest bankruptcies, the airline industry is near an inflection point where industry-wide consolidation and restructuring is possible. AMR can either be a leader in this process or wait and become the final victim. Sometimes bankruptcy is the answer to your prayers.

The fact that every other major airline has either recently filed for bankruptcy (Delta, NWA), is emerging shortly after shedding legacy costs (US Air, United), or had their bankruptcy baptism of fire years ago (Continental) seems to make American’s ability to continue without filing for bankruptcy itself very problematic. The legendary but retired Robert Crandall will not be pleased, but I agree with the author that there appears to be no acceptable alternative.
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