November 30, 2011 in Business

American lands in bankruptcy

Rivals’ reorganization, labor costs, ground parent company AMR Corp.
Scott Mayerowitz Associated Press
Associated Press photo

Passengers arrive at an American Airlines baggage check-in area at O’Hare International Airport in Chicago on Tuesday. The airline’s parent company, AMR Corp., filed for bankruptcy protection to seek relief from crushing debt caused by high fuel prices and expensive labor contracts.
(Full-size photo)

CEO Arpey steps down

The parent company of American Airlines filed for bankruptcy protection Tuesday, seeking relief from crushing debt caused by high fuel prices and expensive labor contracts that its competitors shed years ago.

In announcing the bankruptcy filing, AMR Corp. said that Gerard Arpey, a veteran of the company for almost three decades and CEO since 2003, had stepped down and was replaced by Thomas W. Horton, the company president.

In a filing with federal bankruptcy court in New York, AMR said it had $29.6 billion in debt and $24.7 billion in assets.

‘Modestly’ fewer flights in interim

For most of the 240,000 passengers who fly American Airlines each day, the airline’s bankruptcy filing should have little noticeable impact.

American continues to operate flights, honor tickets and take reservations. It says its frequent-flier program will be unaffected.

Some travelers may eventually see fewer American flights at their airport. The incoming CEO said American would probably reduce its flight schedule “modestly” while restructuring in bankruptcy court. But that would continue a strategy in place at American and other airlines in response to high jet fuel prices.

Steve Varraso, 39, an event planner who had flown from Boston to Chicago’s O’Hare, said he was slightly concerned about his frequent-flier miles on American.

But Varraso and other frequent fliers shouldn’t worry. Eastern Airlines, Pan Am and Trans World Airlines all ceased flying but miles in their programs were transferred over to other airlines that bought some of their assets. TWA miles actually went into American Airlines’ frequent-flier program, AAdvantage.

“Miles are safe,” said Gary Leff, co-founder of frequent-flier site MilePoint. He said the bankruptcies of past airlines “are instructive.” He even suggested there might be some promotions to keep loyal travelers.

Scott Mayerowitz, Associated Press

American Airlines used to bill itself as “something special in the air,” and it was.

It was the first airline to offer curbside check-in. The first with computerized reservations. It invented the frequent-flier program and came up with the deeply discounted Super Saver fare to fill empty seats on its planes.

But it was disastrously behind on one thing – recognizing that its finances were unsustainable.

In the past decade, other airlines cut expenses in bankruptcy reorganizations. American plodded along with high labor costs and aging, gas-guzzling jets. Other airlines found merger partners. American was the awkward kid at the middle school dance.

American was left with little spare cash to make improvements or take risks. The money ran out, and on Tuesday, the time did, too. American filed for Chapter 11 bankruptcy reorganization.

“They were the most innovative airline for years. Nobody could touch them,” says George Hobica, who runs Airfare Watchdog, a site that alerts fliers to discount fares. “They’re a shadow of their former self.”

Some of American’s 78,000 workers will almost certainly lose their jobs or have their pay or pensions cut. Its creditors will lose money. And its stockholders will be wiped out. The stock, which traded above $40 in 2007, closed Tuesday at 33 cents.

The bankruptcy filing is a black mark for American, which traces its routes to carrying mail for the government in the 1920s and was, in the decades between, a pioneer in the nation’s skies.

“American Airlines is a link to the way travel used to be,” says Edward Pizzarello, 37, an executive with a private equity firm who has more than 500,000 lifetime miles with the airline. “It reminds me of a time when people got dressed up in their Sunday best to hop on a plane and fly around the world.”

In 1936, American was the first airline to fly the Douglas DC-3, the first plane designed to carry enough passengers – it seated 21 – to be profitable without making money from mail or cargo.

Mail was no longer the priority. Passengers were. In 1942, American started a catering business, Sky Chefs, to provide meals to its customers.

After World War II, Pan Am and TWA dominated international routes, while American and United focused on the domestic skies. In 1948, American rolled out coach seats and family fare plans to make flying economical.

But it wasn’t until the 1970s that American – and its iconic silver jets – really started to shine.

American introduced routes to the Caribbean and expanded its sophisticated computer reservation system to travel agents. The system, known as Sabre, later became the guts for Travelocity and remains in wide use. Today, 300 million passengers a year use it to browse itineraries and make air, hotel and car reservations.

Passengers in the ’70s were lured by ads promoting “the luxury fleet” and promising them “the best of everything.” They also got cheap fares. Super Saver fares made American the first to figure out how to fill empty seats. They also led to the divide between business fares and cheaper, book-in-advance leisure fares that exists to this day.

In 1978, the government deregulated the airline industry, leaving the airlines to set their own routes and prices. American’s leaders knew what it would mean for business.

American responded by developing the cost-efficient hub-and-spoke system we know today. Millions of passengers were suddenly changing planes in Dallas or Chicago to get to their destination.

“There was a culture of perfection, high-quality standards and innovation,” says Thomas J. Kiernan, who spent 33 years at American before leaving in 2000 as senior vice president for human relations. “That’s what American excelled at.”

To reward loyalty and keep customers from straying to new competitors like Southwest, American launched the AAdvantage program in 1981 – the industry’s first mileage rewards.

That kind of promotion was a hallmark of the CEO at the time, Robert L. Crandall. Deregulation required more clever marketing by the airline industry, which had had little need for it before.

F. Robert van der Linden, a curator at the National Air and Space Museum, says American was “among the first to understand the brave new world” after deregulation.

Crandall found creative ways to cut costs, too. He is known for a decision in 1987 to remove one olive from each salad. The reasoning: Passengers wouldn’t notice, and the airline would save at least $40,000 a year.

Crandall also preserved the company’s distinctive look. The planes were polished but not painted. “No paint means less weight,” the CEO once explained. The unpainted look, he said, keeps “the sun glinting off our ‘silver birds.’ ”

As other airlines failed in the 1980s and 1990s, American grew. It took over Eastern’s Latin America routes and built up a hub in Miami. The demise of Pan Am and TWA left American and United as de facto national airlines, carrying the flag for the U.S. in the sky.

That prominence was perverted on Sept. 11, 2001. It was an American Airlines jet, an unpainted Boeing 767 with red, white and blue stripes down the side, that sliced into the north tower of the World Trade Center.

The jet that hit the Pentagon was American’s, too, Flight 77. The second plane to hit the trade center and the aircraft that crashed in Pennsylvania belonged to United, which filed for bankruptcy in 2002.

Delta, Northwest and US Airways all headed to bankruptcy court, too, in the years following the attacks.

American’s workers made concessions, but it wasn’t enough.

In the past few months, American announced ambitious plans to replace its fleet with fuel-efficient planes. But those jets will take years to arrive.

“They’re still a major player, and I think they always will be,” van der Linden says.

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