To Tom Horton, new CEO of American Airlines’ parent AMR Corp. (NYSE:AMR), the legacy carrier’s bankruptcy filing on Tuesday isn’t just the way out of its myriad troubles, it’s the way up. While it’s customary for corporations to put the best spin possible on the worst news imaginable, in AMR’s case, Horton has a very good chance of being right now that he has taken over from Gerard Arpey, who headed AMR for seven years.
American, which at $24.7 billion in assets ranks as the second-largest airline bankruptcy in U.S. history, is by no means penning its epitaph. In fact, bankruptcy might turn out to be the beginning of the storied airline’s Second Act.
Since the tragedy of 9/11 — which came on the heels of AMR’s acquisition of bankrupt TWA — American has lost $10 billion over the decade, and its cost gap reportedly is $600 million higher than that of its rivals. While the airline has fought hard for years to avoid filing Chapter 11, the convergence of many factors defined for AMR that this could be a “now or never” moment.
“Over the past decade, virtually all of our big competitors took this step,” Horton told CNNMoney. “And as a consequence, they lowered their costs and improved their capital structure in a way that made them much more competitive.”
The U.S. airline industry has been bedeviled by economic adversity, fuel price volatility, high fixed costs and fierce competition from low-fare carriers like Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU). AMR rivals Delta (NYSE:DAL), United (NYSE:UAL) and U.S. Airways (NYSE:LCC) filed for bankruptcy over the last decade. All improved their fates in the process.
By opting for bankruptcy protection, those carriers lowered costs and improved their capital structures to become more competitive. Now it’s American’s turn to see if the fix that fueled its rivals’ fortunes still has the power to change its fate and secure its future.
But as Horton no doubt already knows, he’ll need to plot the right course through AMR’s turbulence — just as these leaders of competing airlines have had to do in the recent past:
- Delta CEO Richard Anderson replaced his predecessor, Gerald Grinstein in 2007, after DAL emerged from bankruptcy. The company, which under Grinstein had fended of a hostile takeover attempt by US Air earlier that year, subsequently merged with Northwest Airlines (which had filed for bankruptcy on the same day) under the Delta brand. It didn’t hurt that Anderson knew Northwest well — he had been CEO of the airline from 2001 to 2004.
- You might say Jeffrey Smisek stole the bride away from US Airways CEO Doug Parker at the altar. When US Airways and United were in the 11th hour of merger talks back in April 2010, the new Continental CEO sold his board on the urgency of making a play for United, eventually sweeping Parker’s would-be bride off her feet. Now, Smisek toils to effectively blend the two carriers’ cultures, fleets, systems and sets of employees into the world’s largest airline.
- Meanwhile, US Airways’ Parker, who remains a true believer in airline consolidation, is still looking for a partner. And AMR just might fit the bill. Parker, who was CEO of America West before taking over the merged US Air-America West in 2005, shares a history with Horton at AMR — both worked in finance positions with the airline in the late 1980s and early 1990s. Horton gave the Fort Worth Star-Telegram a “no comment” on Tuesday when asked if the bankruptcy filing makes AMR a possible merger or takeover target by another carrier.
In the task of charting AMR’s course for the future, new CEO Horton brings five key attributes to the table:
He understands AMR’s challenges and opportunities. Aside from a four-year stint with AT&T (NYSE:T), Horton has been with American for a total of 22 years. He intuitively understands the airline business, as well as his company’s culture, people, value proposition and the competitive challenges it faces. He knows that while AMR still has $4 billion in cash, it needs to act now to overcome the sector’s headwinds. Overseeing network and fleet planning, revenue management and international alliances gives him an edge in determining ways AMR can differentiate itself on factors other than cost. If successful, that can lure premium travelers, boost productivity and deliver better operating margins.
He proved his mettle at AT&T. Horton left American in June 2002 to become chief financial officer of AT&T. At the time, the telecom giant was struggling under a mountain of debt and fighting off competitors to its long-distance business. Horton, whom AT&T noted had led “a relentless effort to strengthen the company’s balance sheet,” helped T cut its gross debt by 75% and eventually structured its merger with SBC. Former AT&T CEO David Dorman, current nonexecutive chairman of Motorola, once characterized Horton as “unflappable in the face of adversity.”
He isn’t afraid to cut costs. When it comes to paring down AMR’s own expenses, Horton is more than up to the job. Pension costs are a huge — and intensely delicate — problem for AMR. Horton noted in an interview that while pensions are a big part of the company’s cost disadvantage, “once in Chapter 11, there are a variety of factors that come into play — including notably the creditors interest and the creditors committee.”
He knows how critical the new planes are. AMR is going forward with its massive 460 narrowbody jet deal — split between Boeing (NYSE:BA) and Airbus -– because it’s another critical part of its recovery. In a newspaper interview Tuesday, Horton characterized the deal as “rock solid,” noting that AMR already has informed Boeing, Airbus and engine manufacturer GE (NYSE:GE) of its plans to move forward with the new planes. Horton’s assessment of the deal as “the future of the company” is no overstatement: Replacing American’s current gas-guzzlers with the new jets will slice a big chunk out of its fuel bill. GE’s new LEAP-X engines, which will be outfitted on Boeing’s 737-MAX and Airbus A320neo jets, aim to boost fuel efficiency by 15%.
He knows the inning and the score. Horton harbors no illusions about the daunting task ahead. He knows AMR has just one chance to turn things around — and this is it. “We confronted our challenges head on, but in the end, we are now faced with the accelerating impact of factors outside our control and a widening cost gap we have not been able to close. A situation that had to change, one way or another,” Horton told AMR employees in an internal letter on Tuesday. “Our Board decided that it was necessary to take this step now to restore our profitability, operating flexibility, and financial strength, before we missed the opportunity.”
Bottom Line: AMR faces a tough battle as it tries to plot a new course to profitability — and today’s climate is far less favorable than it was when its competitors filed back in the 2000s. Labor unions, which already have made major concessions to keep AMR afloat, will be asked to sacrifice again. Horton will be tasked with cutting costs radically, while using a scalpel instead of a cleaver. He’ll also need to use the patience, passion and persistence he’s acquired in his hobby of bonefishing if AMR is to land the next elusive airline opportunity.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.