After losing nearly $11 billion since 2001, in November 2011 American Airlines sought Chapter 11 bankruptcy protection. In Chapter 11 the debtor company remains in control of its business assets subject to a plan of reorganization approved by creditors and the Court. In American’s case despite traumatic changes at the top, painful labor reform, and competitors eagerly eying its routes and pilots, the company has maintained, even improved, its bottom line. In short, the system works.
The More Things Change …
As its Chapter 11 case was being filed American’s parent company AMR installed Tom Horton as the new CEO. As a holding company AMR owns American’s stock but has no business of its own (think Berkshire Hathaway).
Horton said he wanted American to emerge from reorganization as a stand-alone company but that may have changed. Consider the signs, In the past few months American has been mulling over a merger proposal from its smaller, more profitable competitor, US Airways. And
while the company originally intended to emerge from bankruptcy earlier this year, its counsel asked the Court to extend that deadline while the company considers all its options, including restructuring and merger. The announcement thrilled US Airways, which openly campaigned for the merger even before American filed Chapter 11.
An Offer You Can Refuse
On August 10 American’s pilots union rejected its final offer for a new contract. The rejected terms included unspecified raises as well as a 13.5% share in the new company, and would have significantly reduced American’s labor costs. In fact American was hoping that voluntary concessions would come from all its unions, as the mechanics union had agreed to not long ago. Instead American will ask the Bankruptcy Court to impose terms on the pilots that may very well be worse than what American originally offered.
In short, American’s pilots turned down a raise and could end up with worse terms-seems like a bad move right? Maybe not. Insiders say the union was concerned about the long-term (six years) structure of the contracts, especially when the reorganization was taken into account. Furthermore, the pilots did not like the two-tiered pay scale. Pilots who operate the smaller aircraft would be left with less money: and such aircraft feature prominently in the restructed American Airlines. So it would have been a net loss for the pilots.
But there is another factor at work: namely the long-standing tension between American and the pilots union. Management and the pilots have been at odds repeatedly over the last ten years, and this played a role in the vote, despite leaders from the pilots’ union strongly urging the union to accept American’s offer, fearing a worse deal from the Bankruptcy Court. Even if it may not work out for the pilots, this was “personal” according to union spokesman Gregg Overman, as “a decade’s worth of frustration at management” resulted in the 61% vote to reject American’s offer. Union leaders for the pilots, the mechanics and flight attendants (who vote next week) all urged their constituents to accept American’s terms, fearing a less favorable deal from the Bankruptcy Court. The Court may very well impose harsher terms to get the company, the 3rd largest airline in the world, back on more solid financial footing.
There is however a less emotional and more complex theory for the rejected contract offer by the pilots-call it the “long game” if you will.
Frustrated with the American management, the pilots have not been shy about their preference for the Ch. 11 restructuring to include the merger with US Airways. US Airways however actively encouraged all of American’s unions to accept the deal, feeling that the quicker the labor disputes are resolved, the more quickly restructuring can take place and potentially a merger can occur. The pilots union disregarded that advice, and if they are looking for a merger, are probably betting on the continued labor dispute hurting American’s overall value, thus increasing the need for a merger. American however is banking on the bankruptcy judge imposing even harsher terms that will cut costs and increase profits. As profits increase, American would have more value, and thus be more stable and more difficult to acquire for US Airways.
Clear Skies Ahead
Regardless of what happens with US Airways, American’s outlook is significantly better than it was prior to filing for Chapter 11 protection. For instance, revenues are up across the board, with a notable 10% increase in domestic revenue alone. And the company intends to expand international business. American appears to have achieved this renaissance, in part at least, by catering to corporate customers. Since 2001 for example, 18 airlines have filed for Chapter 11 protection, including Delta and United (the industry’s 800 lbs. gorillas). Thus far all three of these – Delta, United, and American – are all still operating at full capacity. By restructuring their business and shifting their operational focus, these airlines have overcome the industry’s most turbulent times.
And the Point Is …
While it might seem unlikely that your business could glean anything from American Airlines, countless businesses are faced with financial challenges that can be overcome with the help of reorganization. Contact us to find out how we can help. M. Hedayat & Associates has been working with small businesses for nearly two decades. We welcome the chance to hear form you.
Financial Times: American Airlines Considers Strategic Options
USA Today: American Airlines Pilots Reject Contract Offer
U.S. News: American Airlines is Thriving Despite Bankruptcy