How Will AMR's Bankruptcy Impact You?

A few months into its bankruptcy proceedings, American Airlines parent AMR already has trimmed capacity, cut jobs and changed some management positions. Efforts to further restructure the carrier and restore its competitive position will be ongoing for at least the next year. The big question is: What exactly will AA look like upon exiting bankruptcy? No one can say for sure. But answers to other questions about the carrier's turn in Chapter 11 already can be found.

How will AA's bankruptcy impact corporate clients?  

It shouldn't, according to an AA spokesperson. "The court has approved our filings to continue to operate 'business as usual.' " AA's BusinessExtrAA small-business program also will not change, according to the carrier.

Though AA doesn't plan to alter corporate programs, there has been some evidence the carrier in the corporate market "is sacrificing share to others," according to a January J.P. Morgan research note. Time will tell whether Chapter 11 exacerbates or stems those losses. Delta Air Lines, JetBlue Airways and US Airways in the past year all have publicly claimed corporate share gains, even if none have directly alluded to AA as the loser.

However, if Continental Airlines' experience is any indication, bankruptcy alone shouldn't prompt share losses. United chief revenue officer Jim Compton said bankruptcies at competitors during the past decade "really didn't play" into any marketshare movement when Continental, now part of United, competed against them.

Will American shrink? If so, by how much? 

According to a February memo from AMR CEO Tom Horton, AA during the next five years plans to increase capacity by 20 percent at its five "cornerstone" markets of Chicago, Dallas, Los Angeles, Miami and New York.

However, AA's recent actions point to cuts. The carrier is on pace to reduce systemwide capacity by nearly 2 percent year over year from February through April, according to schedule data cited in a Jan. 24 research note from Wolfe Trahan analyst Hunter Keay. Among recently announced capacity cuts, AA in the coming months will shutter Dallas-Burbank and Chicago-New Delhi services, and prune other routes. AA later this year plans to discontinue service from New York JFK to both Tokyo Narita and Budapest and from Chicago to Helsinki.

Though AA's mainline capacity cuts are modest for now, some analysts expect them to deepen. J.P. Morgan aviation analyst Jamie Baker is "modeling for a 10 percent AMR capacity cut" in the course of restructuring. Meanwhile, Deutsche Bank airline analyst Michael Linenberg estimated that a cutback of "as much as 5 percent is a reasonable starting point." After all, such reductions are "typical of most airline reorganizations, in which fleet and network rationalization are part of the process," Linenberg wrote.

Meanwhile, Keay noted that AMR's regional carrier, American Eagle, in the February-to-April period is increasing domestic capacity at a rate of 5 percent year over year. Most of Eagle's new services relate to government-subsidized Essential Air Service contracts awarded in December and set to commence in April, including Chicago-Sioux City, Iowa; Chicago-Waterloo, Iowa; and Dallas-Garden City, Kan.

Though AA is committed to its "cornerstone" strategy, some analysts see an opportunity to de-emphasize a few markets, with Los Angeles and Chicago topping the list. A dissenting voice, Boyd Group International president Michael Boyd, claimed that American's cornerstone strategy "is not directly affected by the filing."

Meanwhile, according to UBS analyst Kevin Crissey, cuts made by AA "should be beneficial to pricing in 2012." Beneficial to airlines, of course, not corporate buyers.

Additionally, AMR is planning to cut 13,000 jobs amid efforts to trim "employee-related costs" by "more than $1.25 billion per year," according to Horton.

Will bankruptcy prompt American to merge with another airline? 

That's the subject of quite a bit of speculation. US Airways has confirmed that it is evaluating a bid. Delta has been rumored to be looking at some or all of AA's assets, and there also have been reports that private equity firm TPG is eyeing an M&A play. Wolfe Trahan's Keay sees only a 20 percent chance that AA will exit bankruptcy as a stand-alone carrier. Dahlman Rose & Co. airline analyst Helane Becker called more likely a scenario in which "certain assets will be sold, rather than the entire company being purchased outright." Still, there are hurdles, especially since any transaction would have to clear regulatory reviews.

How long will Chapter 11 court restructuring take? 

Horton, who replaced previous CEO Gerard Arpey, has gone on record as saying that AMR aims to exit bankruptcy within 15 months. The carrier filed on Nov. 29, 2011, so so if the goal is met, AA could exit by the end of February 2013. The carrier's website continues to note that "it is too soon to say" when the carrier will complete its Chapter 11 reorganization. Dahlman Rose & Co.'s Becker estimated that restructuring would take 18 months, which is roughly the time it took Delta to undergo Chapter 11 reorganization several years ago. Bankruptcy proceedings for United Airlines' then-parent, UAL Corp., last decade took quite a bit longer.

Will the Chapter 11 restructuring impact AA's "direct-connect" strategy or legal disputes with global distribution systems? 

AA said it has no plans to change its direct-connect program in light of its parent's Chapter 11 filing. Meanwhile, AA will continue to pursue litigation against global distribution systems. Citing Chapter 11, the carrier, however, plans to delay proceedings by five months in its federal antitrust case against Sabre and Travelport and by three months in a separate state suit against Sabre. While the federal court at press time had yet to rule on AA's request, the Texas state court agreed to push the trial start date to August. A delay in that case is meaningful, as resolution triggers a two-week countdown to the end of the carrier's full-content agreement with Sabre.

Will bankruptcy impact AA's participation in Oneworld or its joint venture with British Airways? 

It shouldn't. "Our participation in Oneworld and our relationships with our other partners remain unchanged," according to an AA statement. "We will maintain the same strong partnerships during our Chapter 11 filing." However, if AA merges with another carrier, all bets are off.

Which airline competitors benefit most from AMR's Chapter 11 filing? 

It depends if, where and how deeply American makes cuts to its network. For example, if AA takes the ax to Chicago, its largest competitor there, United, likely would be a beneficiary. Another market that some analysts say begs for cuts, Los Angeles, is more nuanced, as domestic market share is highly fragmented. AA for the 12 months ending October 2011 controlled 18 percent of domestic LAX market share, Southwest had nearly 16 percent, United had 15 percent and Delta held 14 percent, according to the U.S. Department of Transportation's Bureau of Transportation Statistics.

So far, quite a few of AA's capacity reductions have entailed schedule pruning at its fortress hub in Dallas, a market that "Virgin America continues to target aggressively to take business travel market share from AMR," according to Wolfe Trahan's Keay. "We expect AMR to defend its turf at DFW."

Still, AA can sense the sharks circling. "Believe me, our competitors see an opportunity to take advantage of any internal uncertainty or instability," Horton told employees in the February memo. "This is a moment when such discord can have profound consequences."

 What impact will bankruptcy have on AA's products and services for travelers? 

According to American, travelers shouldn't experience any major changes. All tickets and reservations have been and will continue to be honored, the carrier promises. AA's frequent-flyer program is fully intact. The carrier plans to continue to pay its GDS and travel agency bills, preserving distribution for corporate travelers. Its airport lounges and other facilities will continue to operate as normal. Its prepaid AAirpass card program will remain unchanged. Furthermore, AA entered bankruptcy with $4.1 billion in unrestricted cash, more than enough to preserve normal operations, according to analysts.

In fact, American is moving forward with some upgrades. The carrier in July placed the largest aircraft order in history, with plans to take delivery of 460 new Boeing 737 and Airbus A320 narrow-body planes from 2013 through 2022. The carrier claims those orders are proceeding, though the purchase contracts now require bankruptcy court approval.

Horton told AMR employees "that by 2017 American's mainline jet fleet will be the youngest in North America, with the versatility to match aircraft size to the markets we serve. This step is central to our transformation and means more profitable flying due to markedly improved fuel and maintenance costs and higher revenue generation."

This report originally appeared in the February 2012 issue of Travel Procurement.