Analysis: American, Chapter 11 and the passenger

American Airlines’ entry into Chapter 11 bankruptcy protection comes as little surprise considering this mammoth carrier lost $11 billion over the past 10 years.

It also comes as no surprise when you recall that other large US airlines, namely Pan Am, TWA, Delta, Northwest, Continental, US Airways and United, have all gone down the same path at some time in their lives.

Most Chapter 11 carriers exit in better financial health. But three carriers, Pan Am, TWA and Eastern, never survived.

How long do US carriers remain under bankruptcy protection? 

Initially an airline will aim to stay in Chapter 11 for 18 months.  But in reality the process can take much longer and it’s not unknown for a carrier to enter Chapter 11 more than once.

Continental entered Chapter 11 twice and survived. TWA was in Chapter 11 three times but failed to emerge and ended up being taken over by American.

United’s CEO Glen Tilton said in December 2002 (at the time his airline entered Chapter 11) that “it is our goal to complete this process [Chapter 11] within 18 months.”  In the end, United did not exit bankruptcy protection until early 2006.

As a rule of thumb, when a carrier enters Chapter 11, its spokespeople tell the media and the passengers that it will be “business as usual.”

But, when you think about it, they can say little else because a Chapter 11 carrier needs passenger confidence on its side.

Chapter 11 is a bankruptcy law which is virtually unique to North America. It is a vehicle which enables an airline to get its financial house in order. From the passengers’ viewpoint it means that underperforming routes will be cut and there may be subtle reductions in customer service.

During a briefing with the US media, American’s CEO Thomas W Horton, admitted that flight reductions are likely.

Also, an email sent out to members by Maya Leibman, president of American’s AAdvantage loyalty scheme, assured them that their miles were secure but added “we will continue to evaluate our operations and service, assuring that our network is as efficient and productive as possible.”

Quoted yesterday by Reuters in the US, Jamie Baker, an airline analyst at JP Morgan said: “Airlines have consistently utilised Chapter 11 as a means of culling unproductive, unprofitable flying. 

“As the only loss-making airline of size, American should have little difficulty in indentifying where to cut. Notwithstanding initial management commentary, we expect no less than a 10 per cent capacity cut.”

Other implications for the passenger:

• Cash flow is paramount. That means Chapter 11 airlines will want to hold onto cash for as long as possible so refunds could take longer. 

• As noted above, American may limit or, dare I say, even downgrade some aspects of its in-flight product over the coming months. It could mean that premium class upgrades (on existing planes) are delayed. Only time will tell.

• Schedules will change and routes will be dropped.

But look on the bright side:

• As mentioned above, cash flow is all-important. Should passengers hesitate to book a Chapter 11 airline then that carrier may be forced to drum up business by cutting fares. (Although how well this would go down with transatlantic partner British Airways is a story for another day).

www.aa.com