As We Expected, AMR Succumbs to Bankruptcy
A bankruptcy filing, while difficult, is the correct move for the American Airlines parent and will benefit the industry.
A bankruptcy filing, while difficult, is the correct move for the American Airlines parent and will benefit the industry.
AMR Corporation , the parent of American Airlines, announced Tuesday that it is voluntarily filing for Chapter 11 reorganization. On Oct. 21, we published our belief that AMR would succumb to bankruptcy and that its common equity would be worthless. We lowered our credit rating on AMR to CC on Monday, as we thought financial distress was imminent. We are maintaining our current $0 fair value estimate, but will lower our credit rating to D as a result of the filing.
We believe that a bankruptcy filing, while difficult, is the correct move for AMR to cleanse its debt-laden balance sheet and bloated cost structure. As of the third quarter, AMR held about $12 billion in debt and $7 billion in pension liabilities compared with $4.3 billion in unrestricted cash ($4.1 billion as of the bankruptcy filing date). We had expected the company's cash balance to dwindle to $1.2 billion at the end of 2012, which we opined was insufficient to operate an airline and repay 2013 debt commitments.
We calculate that the pretax labor cost differential between AMR and other legacy carriers over the past few years was $1.2 billion-$1.5 billion, nearly double AMR's estimate of $800 million. Further, we calculate the cost of operating an antiquated fleet of aircraft cost AMR about $115 million annually in additional costs for repair and maintenance alone, versus the legacy carriers. This number doesn't include the additional cost burn due to operating fuel-inefficient aircraft or the opportunity cost of flying approximately one hour per day fewer over AMR's entire fleet. Collectively, we believe these cost disadvantages caused AMR to file for bankruptcy, and we believe the costs were sufficiently burdensome that even if the company had signed a new labor deal with its pilots, it would not have averted bankruptcy.
There has been speculation of an AMR-US Airways merger after AMR's bankruptcy. We believe this merger would make sense, as US Airways employs a lower-cost structure and would be profitable on the domestic front, while AMR, given its strong international presence, would operate the international routes. However, we acknowledge that complications exist, specifically pilot integration, that could derail a merger.
Even if a merger doesn't occur, we expect that the AMR bankruptcy will benefit the industry. We think AMR was extremely aggressive on pricing as it struggled to survive; now that the company will emerge with a leaner cost structure, we expect ticket prices will trend higher over the long term.
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