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Only fliers are safe in American Airlines bankruptcy

November 29, 2011 | 10:06 am

   

American Airlines has filed for bankruptcy protection, so is it time to panic? As with most such questions, the answer depends on to whom the question is addressed.

For most fliers, the bankruptcy should have little immediate impact. The airline said that it intends to continue flying, that seats will still be sold, tickets honored and even frequent-flier points and awards handed out.

But for creditors, suppliers, employees and investors, it will be time to take out the shears -- because all are expected to take a haircut.

That impact goes to the heart of the role that is built into a Chapter 11 bankruptcy protection. The courts have become one more management tool to be used to reshape a company and an industry that is under financial pressure. Other airlines know this well; American’s decision follows in their tracks.

Chapter 11 is designed to allow a company, in this case American Airlines parent, AMR Corp., to reorganize itself, to shed debt and to force cost-cutting, particularly of wages. It's a scenario that the airline industry has seen before, when Delta Air Lines and United Airlines came out of bankruptcy proceedings leaner and more competitive than when they went in.

The big target is labor contracts, especially for American -- which has paid higher wages more than those of its competitors. Delta, United and US Airways used their bankruptcy fights to force sizable pay cuts and rule changes for employees ranging from pilots to mechanics.

Those cuts made United and Delta better partners for later mergers, a path that allowed them to become stronger global networks, while American shrank to the nation’s third-largest airline as measured by passenger traffic.

At the end of the day, bankruptcy cases are all about money, and American was facing its fourth-consecutive year of operating at a loss.

Last year, American was the only major U.S. airline in the red, with a net loss of $471 million. Delta had net earnings of $593 million, while United earned $854 million.

Things will be relatively stable for consumers in the short run, but longer term is very much up in the air. Schedules, ticket availability and prices will be reevaluated and could change.

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