American Airlines Nears Bankruptcy
From tomorrow's New York Times:
American Airlines Nears Bankruptcy
By MICHELINE MAYNARD and RIVA D. ATLAS
American Airlines has begun seeking commitments for up to $2 billion in financing should it decide to seek bankruptcy protection, a banker briefed on the plans said yesterday. The head of the airline's flight attendants' union said a Chapter 11 filing could come in the near future.
The preliminary talks between the AMR Corporation, the parent of American, and lenders are focused on raising $1 billion to $2 billion in debtor-in-possession financing, the banker said. The financing would be led by Citigroup, which issues a credit card that has a mileage reward program with American, the banker said.
While the company continued meetings yesterday with its labor unions, from which it is seeking $1.8 billion in wage and benefit concessions to avoid a Chapter 11 filing, the discussions with lenders indicate that American is seriously preparing for that possibility. American, which is based in Fort Worth, has said it needs to cut $4 billion a year in operating costs to remain solvent. Executives have identified $2 billion a year in savings by reconfiguring routes, cutting salaried jobs and other streamlining but maintain the unions must contribute the rest.
The chief executive, Donald J. Carty, has stressed that he wants to work with the company's unions to resolve the situation without a bankruptcy filing. He met yesterday with the board of the Association of Professional Flight Attendants at the group's annual convention in Fort Worth to discuss the airline's situation.
On Friday, the president of the union, John Ward, told members in a message posted on the association's Web site that the union thought a bankruptcy filing "may be sooner rather than later."
Speculation about the chances of a filing has circulated in the industry for some time, but Mr. Ward's prediction contributed to a 14 percent decline yesterday in the shares of AMR, which closed at $2.41. They have fallen 92 percent over the last year.
An American bankruptcy would be the third Chapter 11 filing in less than a year by a major airline. US Airways, which filed for bankruptcy last summer, hopes to emerge by March 31. Meanwhile, United Airlines, part of UAL, has not yet completed a restructuring plan in its Chapter 11 filing, which was made in December.
Mr. Ward said leaders of the flight attendants' union would continue to meet with the company to discuss concessions. "This certainly is not a position we would choose to be in, however, the situation is what it is and an AMR bankruptcy filing would only make this difficult situation worse," Mr. Ward told union members.
Mr. Ward said he did not expect management to relent on its request for $340 million in concessions from the flight attendants. "We must, however, move quickly to protect our contract from a bankruptcy judge and AMR's creditors," he said.
A spokesman for the airline, Todd Burke, refused to comment on Mr. Ward's warning. But he said the company had repeatedly told its unions that "time is of the essence." American lost $3.2 billion in 2002 and ended the year with $2.7 billion in cash on hand, of which $775 million was restricted, meaning it has about $2 billion to run its day-to-day operations.
That should be enough for the airline to operate through the spring, when it must secure concessions from its employees or face a bankruptcy filing, said Morten Beyer, the founder of Morten Beyer & Agnew, an airline industry consulting firm based in Arlington, Va. Several analysts have said that American, with its broad route structure and international flights, would be particularly vulnerable to negative effects of a war with Iraq and that a prolonged conflict would increase the chances of a bankruptcy filing.
However, Mr. Beyer said American would be more appealing to potential lenders than United, which encountered difficulties in arranging $1.5 billion in debtor-in-possession financing last December.
Although American's unions have thus far resisted its bid for concessions, Mr. Beyer said the relationship between labor and management there was less strained than at United, where unions are actively seeking an outside investor in hopes of replacing the management team led by the chief executive of United, Glenn F. Tilton.
The role of Citigroup in arranging the financing for American is reminiscent of a loan arranged by Bank One for United when it sought protection from its creditors.
"The talks are still very informal," said the banker involved in the discussions. "American's management is still optimistic that it can restructure its debts out of court."
A spokesman for Citigroup, Daniel Noonan, declined to comment.
Citigroup's American Airlines credit card is "the single most successful credit card in the country in terms of the dollars it generates in spending," said David Robertson, publisher of the Nilson Report, which tracks the credit card industry. The American card accounts for about 3 percent of Citigroup's annual earnings per share, according to a report issued yesterday by Jon Balkind, a banking analyst for Fox-Pitt, Kelton.
Earlier this year, American retained Weil, Gotshal & Manges, which specializes in bankruptcy cases, for advice on a potential filing.