The Banking and Strategy Initiative

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Global Aviation Woes: Bankruptcy and restructuring , the winning strategy

United Airlines

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American Airlines joined its peers United Airlines and others as CEO Gerard Arpey sat out and gave the reins to American Airlines President Tom Horton just an hour ago at best. United, Delta and even US Air have earlier used a bankruptcy filing to walk into a safe place and design a way out of the debt overhang and union woes. AMR is the owner of the last full fledged airline to opt for bankruptcy protection, another being the low fare carrier Southwest Airlines

It’s business as usual for passengers as the airline must have reminded its frequent flyers in the Advantage program

LONDON, ENGLAND - OCTOBER 06:  Gerard Arpey, t...

via @daylife

After negotiations over pilots pay failed and Horton was appointed CEO, the parent of American Airlines filed for bankruptcy in a Manhattan bankruptcy court. The bankruptcy shield has worked for United in 2001 and again later , given the overhang of pay settlements with unions. America suffers from an aging fleet, high salary overheads and  exorbitant fuel prices as fuel jumped 40% in the latest quarter when it posted  $162 mln loss The union stalemate could have given AMR another $800 mln in annual savings. Labor Costs have been brought down to 22-23% for United Continental and Delta in bankruptcy protection while American still pays out 31% of its operating budget in salaries, something it can avoid at 10, Bankruptcy Lane. Of course, the fact that everyone else had done it was working to the airline’s disadvantage, in losses since 2008

Read up AMR’s financials at Bwk, AMR:US  AMR will be renegotiating Pensions to a saving of $800 mln with APA but now under bankruptcy and also leases for its expensive MD-80 aircraft from McDonnell Douglas. It has fresh orders for 460 aircraft with Boeing and Airbus this year. Common holders of AMR, may yet get a post bankruptcy warrant or two from the bankruptcy court Holders do not include many large investors as shares have fallen 77% this year before today, PRIMECAP holding 12% of the airline for less than 1% of its portfolio among others like Forest Investment for $500,000(304k shares) and Chesapeake(362k shares for 1.8% of its fund)

AMR Corporation

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The Airline parent has $29 bln of debt and had unrestricted cash of $4.5 bln at present that would  have

Tom Horton

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lasted another 6 months and according to Morningstar had another $800mln in free assets that could be used to generate cash in 2012. American has refused the bankruptcy option in 2003, Asprey signing up for $1.6 bln in pay cuts from the unions, while Horton had left American in 2002 and come back after sending SWB into a merger with AT&T in 2005

American has since also fallen behind other airlines as it fights with online travel agencies Travelport(Orbitz) and Sabre , suing them on anti-trust grounds. It has avoided the prospect of mergers as well, United walking away with Continental in 2009 and he rnerged airline performing quickly in profits with larger route networks Another airline has sued Amadeus and Sabre while AMR seeks to appeal against SAbre in particular soon after the Texas court dismissed the airlines’ suits

LOS ANGELES, CA - MAY 27:  Travelers wait to g...

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 Travel agents still account for two-thirds of U.S. airline ticket sales and dominate the market for high-margin corporate accounts prized by carriers.(WSJ)

The Airline spent the last three months denying plans to file Chapter 7 (liquidation) or Chapter 11 (protection) If all goes to plan, the stock might well pick up to 3-5 times its current discounted value as Tom Horton has already earned his stripes as a no nonsense manager under Arpey in the last few years

Its fleet renewal plans are expected to start small in 2012 with a dozen 757s being retired, but new orders by the Airline will not be delivered for at least 5 more years. Many corporates have also been cuting down on air travel and airlines are likely to see a 30% revenue drop in 2012. AMR reported $6.5 bln in revenues for the September quarter and is looking a t a topline of $20 bln for 2012. Its 1009 loss was $1,500 bln at Op Costs of 90% and 2010 loss on $19.7 bln revenues was $471 mln at Op costs of 86%

American Airlines Center, home of the Dallas S...

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