American Airlines bankruptcy signals end of an era

The model of hub-and-spoke legacy carriers has proved difficult to perpetuate.

By InvestorPlace Nov 29, 2011 11:56AM

Image: Airline (© Christie & Cole/Corbis)By Jeff Reeves, InvestorPlace.com


AMR Corp. (AMR), the parent of American Airlines, announced Tuesday that it will file for bankruptcy protection. Crippling debt, labor issues and higher fuel prices have clipped the company's wings in recent years.


So what does this mean for consumers? Not a whole heck of a lot. American and its partners will keep flying as usual, and day-to-day operations will be unaffected. Based on past Chapter 11 filings by airlines, it's also likely that frequent-flyer programs will remain unchanged, so no need to panic about lost miles.


On the business side, however, the move could have a big impact on the entire airline industry.


The AMR bankruptcy is noteworthy because it is the last nail in the coffin of so-called hub-and-spoke carriers that represented the old guard of America's previous airline operations. The five legacy carriers from that era include American and:

  • Continental Airlines, which slid into bankruptcy first, in both 1983 and 1990. Continued balance sheet troubles eventually resulted in its merger with United to form United Continental Holdings (UAL) in 2010.
  • Delta Air Lines (DAL), which filed for bankruptcy in 2005 and emerged in 2007.
  • United Airlines, which filed for Chapter 11 in 2002 after the drag of Sept. 11, 2001, and the cost of subsequent regulations. It emerged in 2006 and merged with the aforementioned Continental in 2010.
  • US Airways (LCC), which also was hit hard by the downturn in air traffic and new regulations after 9/11. The company went bankrupt in 2002 and emerged in 2003 but had to declare bankruptcy again in 2004.

You might think by now that bankruptcy would be old news for airlines. But the phenomenon is interesting because part of the reason AMR Corp. was forced to declare is because its rivals already have done the same thing -- and were allowed to significantly restructure debts and refine labor contracts to achieve better numbers. In some ways, American had a competitive disadvantage simply by being the only legacy carrier that had not filed for Chapter 11.


Put another way, there was no reason for AMR not to declare bankruptcy. After all, it's still flying planes -- it just gets to wave off some creditors and stick it to the unions now.


Think that's a bit harsh? Well, realize that airlines were in many ways the original "too big to fail" story of the 21st century. After 9/11, the U.S. Treasury created the Air

Transportation Stabilization Board to provide emergency financing to carriers. The idea was that these businesses were institutions crucial to the overall economy and that it was in the best interest of taxpayers to bail them out.


Sound familiar?


Granted, the loans extended after 9/11 totaled less than $2 billion by the end of 2002. That's a drop in the bucket compared with the mammoth bank bailout. It's also worth noting that United Airlines was denied financing by the ATSB and forced into bankruptcy just a few days later.


But it all prompts a question: What is going to become of our airline industry if, based on the current model, the legacy carriers simply can't turn a profit? Why is it fair that they get to keep declaring bankruptcy and maintain their big reach when it seems like it's only a matter of time before we see another Chapter 11 filing?


It's not like airlines are simply a bad business. Southwest Airlines (LUV) continues to thrive, with the low-cost leader posting annual profits every year since 2007 despite volatile fuel prices and the severe economic downturn. Boeing (BA) continues to book billions of dollars in aircraft orders. Regional carrier Alaska Airlines (ALK) hasn't had a quarterly loss since early 2009 and is soundly profitable. There obviously are well-run airlines out there.


Perhaps there will be even more consolidation among the legacy carriers. Or perhaps Southwest or another up-and-comer will rise to rival the reach of these older brands.


Whatever the case, the old guard of the U.S. airline industry appears to be dying. Aside from AMR Corp. and other airlines developing a fleet of flying cars or teleportation devices, it's hard to imagine how they will ever return to dominance.



Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.




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17Comments
Nov 29, 2011 4:15PM
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"don't blame it on labor issues. If they treated their employees better , they wouldn;t have labor issues. "

 

You can give the unions all the money and they would still demand more.  This is just a fact, and proven time and time again by many unions.  It's way past time to allow non-union workers in the door and provide some healthy competition to the union fat cats.

Nov 29, 2011 1:51PM
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Just more sad proof that we're counting backwards to zero regarding our economy thanks to high energy costs and high cost of living, in the land of perpetually shrinking opportunity.
Nov 29, 2011 3:36PM
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And the people at the top of the food chain still do not understand what the problem is. Take A pay cut dummy, and quite ripping off the customer!!    But they don't care as long as they get there unearned salaries.
Nov 29, 2011 2:08PM
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AA's demise was years in the making.   Their service and attendants are horrible.  Their bonus miles system sucks!  I will do almost anything to keep from flying AA.  My neighbor who flys everywhere told his company last year that he would no longer fly AA.  Their bankruptcy is the logic conclusion to a terribly run business.  Good riddance.
Nov 29, 2011 4:33PM
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This definitely signals the end of an era...an era of safe, efficient, high quality air transportation that catered to the needs of the customer and not the stock holder.  Airline management today has a philosophy of quantity is better than quality.  There are some things that American could or should have done since deregulation to cut costs, but they sincerely tried to provide the travelling public a comfortable ride from point A to point B, it's just that today's consumer didn't appreciate the quality their previous generation enjoyed decades earlier.

 

Nov 29, 2011 2:04PM
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"Don't own an airline stock"=My first lesson in Stock Buying 101 that I learned 23 years ago.
Nov 29, 2011 4:57PM
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Cheap air travel is at a end. The only one making a tidy profit is the insurance companies.

 

We may go back to train travel. At least they have special trains that allow you to bring your car too.(pack it with as much luggage as you want, lol!)

Nov 29, 2011 6:36PM
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First AAL should have filed years ago but the CEO put the employees first. They did not then and still dont today appreciate that.

Second AAL finally had no choice, they had to file to compete due the competion achieving lower cost through BK. AA has been bleeding cash for years looking for any other option but BK.

Third, SWA has only survived because they have been growing every year which has diluted their overall cost per seat mile, guess what, thats changed going forward, they also benefited from fuel hedging.

Last, although I do not still work for AAL I am very proud of the company and its leadership, sorry it had to end up here.

Nov 29, 2011 4:19PM
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If the airlines had been better connected, they too would have been found "too big to fail."

 

Now that the seed corn from WWII has all been eaten, and it's becoming increasingly clear that the party is so over, the only institutions from that era with much chance of surviving are the recipients of corporate socialism.

Nov 29, 2011 3:51PM
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Southwest has kept profitable by futures in oil.  Most of them, the ones they purchased at relative cheap prices, have expired.  They're pretty much back on the same playing field.  Expect to see southwest struggle, but then again, if  I remember right, they are only selective on certain airports.  They don't really have a hub and spoke system, you get stuck at an airport, you just get stuck.

 

Alaska is very unsafe, with a very bad reputation of not maintaining their aircraft.  And many of their pilots are very inexperienced, as those pilots are the only ones they can attract to fly their Dash 8's around for 19K a yr for first officer and maybe 30K for captain.

 

Good luck when you fly some of these airlines. 

The solution is get them off the current fuel, into something else. 

Nov 29, 2011 6:31PM
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all you people who retired from an airline need to kick the bucket real soon because your retirement is going to go away as soon as the chinese buy the airlines
Nov 29, 2011 5:30PM
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I hope American never gets out of bankruptcy and ends up like TWA...  The airline is the worst managed of them all, nasty flight attendants, old planes that should have been taken out of service in the 90s, abysmal on-time performance.  I used to fly them out of DFW and have now stopped for 2 years and fly USAir instead.  What a difference!  
Put AA out of their misery and hope someone better buys them out of bankruptcy and fixes them.  
Nov 29, 2011 7:21PM
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George Bush said their would be a long painful recession when he left office. People are still going under with their homes. The middle class made this country. How about a few nuts for us from the squirrels in charge. Fly American - Bank of America - Made in America. Mexico and Canada are doing good. Those Mexicans in Mexico speak very good English unlike those who sneak across the border and become not made in America. They buy beer & cigarettes with food stamps why not airline tickets to drive the economy?
Nov 29, 2011 6:26PM
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another company killed off by union help, But not to worry the chinese are gearing up to take over the US airlines anyway. They will buy them change the names take management off shore and kill off the greedy unions.

Nov 29, 2011 1:02PM
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don't blame it on labor issues. If they treated their employees better , they wouldn;t have labor issues. This organization has been mismanaged for years. Blame the idiot who insisted on the merger with TWA, the second worst managed airline in the business. The first worst, of course, is US Scareways, formerly, Agony Airlines. That's Alleghany to you who are not familiar with the airline industry terminology.

 

Nov 29, 2011 4:05PM
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i don't blames the airlines carriers with the high gasoline prices that they pay and a huge over head they have. i purchase ticket for 900 dollar for 20 hours flight the coast of 1 hour flight is around 2500 dollar and this is only fuel in order of them to make money they have to charge me 3000 dollar for this ticket but is not affordable so for the peoples that want better service go find another's suckers' to give you service for the money that you pay them
Nov 29, 2011 1:40PM
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The employees of airlines in this country are treated like crap by their management and the flying public. I am retired from the airline industry and I remember when things were great. I worked for a us carrier which was awful and then I worked for a european airline which was fabulous. I think this whole country should go back to the crown. The British and Europeans do everything better than this country which is ONLY concerned with the almighty $$$$$$$$.
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