Talking, heads, industry observers, and general aviation pundits have been tossing about all sorts of analysis over whether the Ft. Worth based carrier might finally join its legacy brethren in the bankruptcy Walk of Shame. Delta and United have done it. US Airways and merger partner America West both did it twice, as did Continental (although unlike the others, Continental’s last bankruptcy filing was two decades ago). In the process, these airlines cut costs, attracted new financing, and emerged as stronger (yet still not perennially profitable) competitors with labor costs much lower than American, and the analysts are smelling blood in the water from a cost standpoint.
However, it might be prudent to look at the reasons why American probably won’t be declaring bankruptcy any time soon:
1. It’s harder. When Delta and Northwest filed on the same day in 2005, it wasn’t mere coincidence. The airlines were filing ahead of a change in the bankruptcy laws that placed much stricter limitations on reorganization. In short, after the changes, it became far less likely that companies entering bankruptcy would emerge. The idea that American needs bankruptcy to maintain competitive advantage doesn’t wash, because the bankruptcy process its competitors went through no longer exists.
2. The airline has a lot of cash. Sure, AMR lost $286 million in the second quarter, and that’s not exactly chump change for any airline, but compare that with their current cash reserves of $4.2 billion (remember a billion is a thousand million). When airlines die, it typically boils down to an inability to make their debt payments with their cashflow plus their existing cash. American’s making the debt payments just fine, although it’s definitely treading water. Unfortunately that includes payroll. The Australian airline Ansett folded in 2001, and employees didn’t receive their final payments until last month.
3. The strike threat seems to have faded. Bankruptcy basically prevents labor strike (employees are considered creditors, and are bound by law to continue providing services in bankruptcy), but this is one protection American won’t need. Airlines are subject to the Railway Labor Act, which means labor contracts remain in effect until new ones are negotiated, and unions can’t strike until the National Mediation Board (NMB) which answers to the White House, has declared negotiations at an impasse. Preservation of jobs is the current political Holy Grail, and most observers agree even a short strike would exhaust American’s cash reserves (the airline’s large debt payments don’t change, even if a strike shutters operations). Union representatives expressed frustration over this in March, saying a strike was unlikely in the near term.
4. Lower costs and increased revenue are on the horizon. While there is no silver bullet to fix the cash flow problem, American has taken steps to fix both ends of the equation. New narrowbody aircraft from Boeing and Airbus have been ordered, which promise significant savings in operating and fuel costs. On the revenue side, American has aggressively inked codeshare and revenue sharing agreements with its Oneworld partners (to the ire of its unions), which provide additional traffic and revenue without an increase in costs (in fact, costs are split between the partner carriers in the case of a joint venture).
5. Labor costs aren’t the whole problem. Proponents of bankruptcy cite American’s uncompetitive labor costs, saying the union contracts and pensions could easily be tossed out by a bankruptcy court judge in a quest to make American’s labor costs more attractive. This is true, compared with legacy carrier competitors like United, Delta, and US Airways, who all enjoy much lower labor costs than American. However, one carrier that has similar, if not higher labor costs, is perenially profitable Southwest Airlines, giving a strong hint that expensive labor and profitability aren’t mutually exclusive. However, Southwest Airlines is much more conservative on debt (meaning they have less in hock, and borrow money much more inexpensively). The good news about debt payments is (assuming interest rates don’t skyrocket, which is another peril of getting too short on cash) that they generally trend downwards if the airline continues to make them on time, and easing off the debt load a little bit (although they haven’t been doing this, let’s face it, sometimes cash is just more important) will eventually lighten the liferaft and make it easier to paddle to shore.
There you have it. Despite shares falling 40% and a media circus calling for American to do the obvious thing and declare the bankruptcy it has spent the better part of a decade avoiding, there’s at least one qualified opinion out there that says there’s still a good fight for this legacy airline to fight.
SOURCE: Examiner.com American Airlines bankruptcy? Not so fast! – National airline industry | Examiner.com http://www.examiner.com/airline-industry-in-national/american-airlines-bankruptcy-not-so-fast#ixzz1a2FKL4QZ