American Airlines Goes Bankrupt, Signaling End of an Era

by Jeff Reeves | November 29, 2011 9:48 am

AMR Corp. (NYSE:AMR[1]), the parent of American Airlines, announced today it will be filing for bankruptcy protection. Crippling debt, labor issues and higher fuel prices have clipped the company’s wings in recent years.

So what does that mean for consumers? Not a whole heck of a lot. American and its partners will keep flying as usual, and day-to-day operations will be unaffected. Based on past Chapter 11 filings by airlines, it’s also likely that frequent flyer programs will remain unchanged — so no need to panic about lost miles.

On the business side, however, the move could have a big impact on the entire airline industry.

The AMR bankruptcy is noteworthy because it is the last nail in the coffin of so-called “hub-and-spoke” carriers that represented the old guard of America’s previous airline operations. The five legacy carriers from that era include American and:

You might think by now that bankruptcy would be old news for airlines. But the phenomenon is interesting because part of the reason AMR Corp. was forced to declare is because its rivals already have done the same thing — and were allowed to significantly restructure debts and refine labor contracts to achieve better numbers. In some ways, American had a competitive disadvantage simply by being the only legacy carrier that had not filed for Chapter 11.

Put another way, there was no reason for AMR to not declare bankruptcy. After all, it’s still flying planes — it just gets to wave off some creditors and stick it to the unions now.

Think that’s a bit harsh? Well, realize that airlines were in many ways the original “too big to fail” story of the 21st century. After 9/11, the U.S. Treasury created the Air Transportation Stabilization Board that provided emergency financing to carriers. The idea was that these businesses were institutions crucial to the overall economy, and that it was in the best interest of taxpayers to bail them out.

Sound familiar?

Granted, the loans extended after 9/11 totaled less than $2 billion[5] by the end of 2002. That’s a drop in the bucket compared with the mammoth bank bailout. It’s also worth noting that United Airlines was denied financing by the ATSB and forced into bankruptcy just a few days later.

But it all begs the question: What is going to become of our airline industry if, based on the current model, the legacy carriers simply can’t turn a profit? Why is it fair that they get to keep declaring bankruptcy and maintain their big reach when it seems like it’s only a matter of time before we see another Chapter 11 filing?

It’s not like airlines are simply a bad business. Southwest Airlines (NYSE:LUV[6]) continues to thrive, with the low-cost leader posting annual profits every year since 2007 despite volatile fuel prices and the severe economic downturn. Regional carrier Alaska Airlines (NYSE:ALK[7]) hasn’t had a quarterly loss since early 2009 and is soundly profitable. There obviously are well-run airlines out there.

Perhaps there will be even more consolidation among the legacy carriers. Or perhaps Southwest or another up-and-comer will rise to rival the reach of these older brands.

Whatever the case, the old guard of the U.S. airline industry appears to be slowly dying. Aside from AMR Corp. and other airlines developing a fleet of flying cars or teleportation devices, it’s hard to imagine how they will ever return to dominance.

Jeff Reeves[8] is the editor of InvestorPlace.com. Write him at editor@investorplace.com[9], follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.

Endnotes:
  1. AMR: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMR
  2. UAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=UAL
  3. DAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DAL
  4. LCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=LCC
  5. totaled less than $2 billion: http://www.cato.org/pubs/regulation/regv26n1/v26n1-noted.pdf
  6. LUV: http://studio-5.financialcontent.com/investplace/quote?Symbol=LUV
  7. ALK: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALK
  8. Jeff Reeves: http://investorplace.com/2011/11/2011/10/2011/10/no-bear-market-for-5-funds-etfs-slv-gld-thd-xrt-fdn/2011/10/author/jeff-reeves/
  9. editor@investorplace.com: mailto:editor@investorplace.com

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