AMR's American Risks Losing Control of Bankruptcy Exit as Suitors Circle
By Mary Schlangenstein and David McLaughlin – Jan 19, 2012 12:01 AM ET
American Airlines parent AMR Corp (AAMRQ). risks losing control of its ability to exit bankruptcy as an independent carrier after three possible suitors emerged within two months of its Chapter 11 filing.
The outside interest means AMR may need to move sooner than planned on steps such as reworking labor contracts to cut costs, said Hunter Keay, a Wolfe Trahan & Co. analyst. The third- largest U.S. airline must craft a restructuring plan that can win over creditors who may receive alternative offers, he said.
“This could expedite some of the more difficult decisions,” Keay said in an interview from New York. “AMR is going to have to prove to its creditors that its stand-alone exit plan adds more value than a bid by a competitor, and that is likely to be difficult.”
Delta Air Lines Inc. (DAL), US Airways Group Inc. (LCC) and TPG Capital are assessing possible bids for Fort Worth, Texas-based AMR, people familiar with the matter have said. They’re circling an airline that has moved at a slower tempo since its Nov. 29 Chapter 11 filing than rivals did when they were in bankruptcy.
AMR has hired advisers and filed papers to keep or reject certain planes, including some of its oldest jets, and spare parts. It hasn’t matched the speed of former United Airlines (UAL) parent UAL Corp., which asked for $2.4 billion in union concessions two weeks after filing in 2002.
Delta moved to void its pilot contract after six weeks in court protection. Northwest Airlines Corp., which entered Chapter 11 on the same day as Delta in 2005, went to a judge a month later to impose new labor terms if it couldn’t reach agreement on $1.4 billion in annual savings.
American expects to leave bankruptcy “a leaner, more efficient and far more competitive airline,” Chief Executive Officer Tom Horton wrote in a column this month in the airline’s in-flight magazine, without elaborating. Sean Collins, a spokesman, said AMR isn’t commenting on its strategy.
“At this point, it’s really up to American to come up with the plan of reorganization that makes people happy,” said William Swelbar, an aviation research engineer at Massachusetts Institute of Technology. “But the possibility of other options is going to be in the back of the creditors’ minds, and value is in the eye of the beholder.”
Companies filing for Chapter 11 protection have exclusive rights for as long as 18 months to submit a restructuring plans. AMR also entered bankruptcy with $4.1 billion in cash, a U.S. airline record, and is financing its operations instead of borrowing from a third party that might exert pressure for speed.
‘Pace and Velocity’
“They have the luxury of not having a lender dictate the pace and velocity of the case,” said Jay Sakalo, a bankruptcy attorney with Bilzin Sumberg Baena Price & Axelrod LLP in Miami. “They have more flexibility.”
At the same time, winning support early from the unsecured creditors committee is important, Sakalo said. That group will have a say in major decisions outside American’s usual business, including whether to shrink, terminate pensions or merge with another airline. Its nine members include Boeing Co. (BA) and unions for American’s pilots, flight attendants and ground workers.
Moelis & Co., a New York-based investment bank advising the committee, declined to comment, said Andrea Hurst, a spokeswoman. Todd Lehmacher, a US Airways spokesman, and Delta’s Betsy Talton also declined to comment, and a message left for TPG wasn’t returned.
None of the possible suitors is a stranger to airline acquisitions. TPG’s past investments in the U.S. industry include Continental Airlines Inc. US Airways mounted a hostile offer for Delta in bankruptcy five years ago, and Delta agreed to acquire Northwest less than a year after both carriers left Chapter 11.
Wolfe Trahan’s Keay drew a lesson from US Airways’ unsuccessful bid for Delta: It came more than a year into the latter’s bankruptcy, when an exit strategy was already taking shape. Tempe, Arizona-based US Airways or Delta probably would move sooner against American rather than later, when its plans are firm, he told clients in a Jan. 13 note.
Max Newman, an attorney at Butzel Long in Bloomfield Hills, Michigan, said too many issues remain unresolved at AMR, such as new labor contracts and the future of employee pensions, for suitors to act quickly.
‘Unlikely to Commit’
“Without knowing the cost structure, they’re unlikely to commit themselves too deeply to any actual numbers,” Newman said. “They’re sticking up their hands and saying, ‘We want to be involved in a process,’ but I think the process is first going to be labor contracts.”
Negotiations with pilots, attendants and mechanics, baggage handlers and other airport ground workers had been under way for as long as five years when American filed for Chapter 11. AMR sought to boost productivity and trim spending to erase what it said was an $800 million labor-cost disadvantage to competitors.
The first glimpse of American’s finances in bankruptcy is due this month, when the airline plans to start monthly reports to the court, said Tim Smith, a spokesman.
It would be a “critical error for anybody to rush in with a checkbook any time soon,” said Vicki Bryan, a debt analyst with New York-based Gimme Credit LLC.
“All American has been able to do is make the easy choices, to get rid of the old planes,” Bryan said. “The hard decisions are yet to be made.”