by Susan J. Aluise | November 29, 2012 11:10 am
One year ago today, American Airlines’ parent company AMR (PINK:AAMRQ) filed for Chapter 11 bankruptcy protection. Since the beginning of 2011, investors had watched AMR’s mounting losses drive share prices from near $9 in January, to 23 cents on Nov. 29. That’s when the carrier filed the second-largest airline bankruptcy in U.S. history.
The causes were easy to identify. AMR had struggled with a bad economy, volatile fuel prices and high fixed costs. And competitors like Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) were eating its lunch. American’s expenses were about $600 million higher than those of United Continental (NYSE:UAL), Delta (NYSE:DAL) and US Airways (NYSE:LCC) — all of which had used Chapter 11 to cut costs, secure better labor deals and park older, gas-guzzling aircraft.
So, the 75-year-old carrier — the only legacy airline that had not filed for bankruptcy after Sept. 11 — came to that decision after losing $10 billion over the prior decade. Chairman and CEO Gerard Arpey retired that day and handed the controls to then-president Tom Horton.
But that’s just the beginning of this story. This time last year, American embarked on a second act — a massive restructuring effort aimed at helping the carrier not just survive bankruptcy, but soar into the future. After receiving a one-month extension by U.S. Bankruptcy Judge Sean Lane, AMR has until Jan. 28, 2013, to file its restructuring plan with the court.
Here’s how Act 2 is progressing so far in three key areas – labor, pensions and merger talks — and how American’s prospects look:
Although unions had made major concessions to avert bankruptcy back in 2003, AMR needed deeper cuts to survive. Horton announced plans to slash 13,000 jobs and $1.25 billion in annual labor and benefit costs, with the lion’s share of the cuts aimed at the pilots’, flight attendants’ and ground workers’ unions.
Positives: AMR has inked new labor deals with flight attendants and ground workers unions to save $500 million a year. Pilots are now considering a new contract proposal by AMR that includes stock in a post-bankruptcy American and salaries on par with those at United Continental and Delta. Union members are voting on the plan through Dec. 7.
Negatives: Allied Pilots Assn. members voted down AMR’s last contract offer in August by a 60-40 margin — and there are indications that the rift between the pilots and management is far from healed. American’s on-time performance plummeted to 58% in September after the court OK’d the airline’s bid to void its contract with the union.
The Supreme Court on Wednesday refused to block a vote by AMR’s nonunion passenger-service workers on whether to unionize. The 9,700 agents are expected to begin voting next week, with the results be tallied on Jan. 15.
Pension costs were a huge problem for AMR. Many Wall Street observers were surprised that AMR filed for bankruptcy when it did because it still had $4 billion in cash. But AMR’s timing made perfect sense: When Delta, United Continental and US Airways filed for bankruptcy protection in the mid-2000s, they were able to cut costs dramatically by dumping their pensions.
This time last year, American had more than $18 billion in pension liabilities owed to its 130,000 employees and retirees and only $8.3 billion in assets, according to the federal Pension Benefit Guaranty Corp. (PBGC).
Positives: Earlier this month, AMR froze its four underfunded pension plans, meaning current employees will no longer accrue benefits. The airline will contribute to new 401(k) accounts, but pre-bankruptcy pensions are classified as “liabilities subject to compromise.”
Negatives: Under pressure from the PBGC, American didn’t simply fold the pension plans as United did in 2005. Had it done so, the government would have been on the hook for $17 billion in benefits and would have taken an $8.7 billion loss. While the PBGC’s stance was good for taxpayers, United got a much bigger break when PBGC took over its five pension plans.
Airline consolidation drives greater efficiency and economies of scale. But American Airlines wants to exit Chapter 11 as a stand-alone carrier — and only then, consider a merger. US Air CEO Doug Parker, whose company purchased about $1 million in AMR debt for $600,000, wants a deal while American is still in bankruptcy.
After Horton asked the court to void American’s union contracts, Parker reached out to the three unions that represent nearly 55,000 American employees and gained their support for a potential LCC-AMR merger.
Positives: In May, Horton decided to consider merger options as part of the restructuring strategy. Since then, AMR and US Air have signed nondisclosure agreements and begun talks. A merger would strengthen AMR’s domestic network, particularly in lucrative East Coast business travel markets, while giving US Air profitable international routes.
Negatives: A group of bondholders with some $885 million in AMR debt told the airline’s pilots it would support a stand-alone post-bankruptcy American only if a new board was appointed, according to a Bloomberg report on Wednesday.
Parker has labor problems of his own at US Air that could complicate a deal. LCC’s pilots filed a motion with the court this month to gain a voice in AMR’s bankruptcy proceedings. And last week, US Air’s flight attendants overwhelmingly voted to authorize a strike.
It’s not surprising that LCC’s employees are seeking attention now. When America West bought out US Airways in 2005, combining the two airlines’ employees and cultures was bumpy. Seven years later, US Airways still doesn’t have a common contract for both groups of pilots and flight attendants.
American Airlines has weathered a turbulent year in the wake of its bankruptcy filing — and myriad challenges remain as it navigates the remainder of its Chapter 11 process.
For those with a penchant for penny stocks, it’s worth noting that volume in AAMRQ has gone wild, and the stock is up 21% over the past couple of weeks. Then again, even at less than 50 cents a share, the carrier’s stock has virtually no intrinsic value, making it a nonstarter for most investors.
While AMR is working through its second act, it makes more sense to buy US Air on the merger opportunity. LCC shares have climbed 200% this year on deal speculation and are trading around $13 now. But if a merger with American gets done next year — which I still believe is the likeliest outcome — LCC has further to fly.
However, I think US Air’s own labor woes could begin to weigh on the stock in the coming weeks, so bargain hunters may get an opportunity before Christmas. If you’re already long LCC, consider hedging with put options in anticipation of a move in the stock.
Bottom Line: American Airlines remains in a tough spot, but there’s always been more magic than mundane about the airline business. And to airline industry romantics — myself included — that quality defies gravity and inspires optimism.
“Every magic trick has a third act,” Michael Caine’s designer of illusions says in the movie The Prestige. But he adds: “Making something disappear isn’t enough — you have to bring it back.” That means Tom Horton’s toughest task is yet to come.
As of this writing, Susan J. Aluise didn’t own any securities mentioned here.
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