Bitcoin sets a new all-time high above $6,000 >>> READ MORE

American Airlines Goes Bankrupt, Signaling End of an Era

'Hub-and-spoke’ legacy carrier model seems doomed for good

    View All  

AMR Corp. (NYSE:AMR), 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:

  • Continental Airlines, which slid in to bankruptcy first, in both 1983 and 1990. Continued balance sheet troubles eventually resulted in its merger with United to form United Continental Holdings, Inc. (NYSE:UAL) in 2010.
  • Delta Air Lines (NYSE:DAL), which filed for bankruptcy in 2005 and emerged in 2007.
  • United Airlines, which filed for Chapter 11 in 2002 after the drag of Sept. 11, 2001, and the cost of subsequent regulations. It emerged in 2006 and merged with the aforementioned Continental in 2010.
  • US Airways (NYSE:LCC), which also was hit hard by the downturn in air traffic and new regulations after 9/11. The company went bankrupt in 2002 and emerged in 2003 but had to declare bankruptcy again in 2004.

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?

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC