Bankruptcy Tracker

American Airlines Files Chapter 11 Bankruptcy

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Mike Fuentes/Bloomberg
The American Airlines corporate office in Fort Worth, Texas. The company's annual revenue in 2010 was $22.2 billion.

The American Airlines bankruptcy, the fifth of a major U.S. airline since 2005, reaffirms the high credit risks associated with the airline industry.  Hewlett-Packard, the largest trade creditor, is owed $31 million.

On November 29, 2011, AMR Corporation, the parent company of American Airlines, and 19 of its subsidiaries filed for Chapter 11 bankruptcy protection from creditors in U.S. Bankruptcy Court for the Southern District of New York, although the company is based in Fort Worth, Texas. In addition to the bankruptcy filing, longtime Chairman and CEO Gerard J. Arpey has decided to retire from the company. 

The bankruptcy filing, reviewed by CreditPulse, describes the intense efforts of company management over the past eight years to cut costs and avoid a bankruptcy filing even though several of its major competitors had effectively used bankruptcy as a cost-cutting tool.  Even as late as November 15th, Mr. Arpey was opposed to filing for bankruptcy, according to information reported in the Wall Street Journal.

Thomas W. Horton who has succeeded Mr. Arpey as Chairman and CEO said "This was a difficult decision, but it is the necessary and right path for us to take -- and take now -- to become a more efficient, financially stronger, and competitive airline," according to a company press release issued on the day of the bankruptcy filing.

At the time of the filing, AMR Corp., a publicly-traded company with $21.2 billion in annual revenues, reported total liabilities of $29.55 billion compared to total assets of $24.72 billion for a debts-to-assets ratio of 1.20.  The debts-to-assets ratio, total liabilities divided by total assets, is an important financial ratio that can be used to determine the solvency of a company.  Included in the company's liabilities is $10.17 billion in long-term debt and capital lease obligations.

In its filing, AMR Corp blamed the competitve disadvantage of its cost structure compared with other major carriers, "the continued penetration and growth of low cost carriers and the continuing unstable and depressed global economic environment which has followed the near collapse of the financial markets in 2008."  A shortage of equity capital was also a major factor as the company's stock price, already low, had fallen from $7.92 per share in January 2011 to $1.61 per share on November 23rd, according to its filing.

The company's largest shareholders are PRIMECAP Management Company (12.4%), Capital Global Research Investors (9.3%), Capital World Investors (8.4%) and Asia Mountain Investment Co. Ltd. and certain affiliates (7.3%).  PRIMECAP is a mutual fund based in Pasadena, California while Capital Global is a mutual fund based in Los Angeles.

Manufacturers and Traders Trust Company located in Baltimore, Maryland and Wilmington Trust based in Wilmington, Delaware are the two largest unsecured financial creditors with claims of $1.039 billion in bonds and $746.4 million in notes respectively, according to the information provided in the consolidated list of creditors-50 largest unsecured claims.

American Airlines' largest unsecured trade creditors are some of the biggest companies in the world (see accompanying chart).  Hewlett-Packard Company, the $115 billion computer and office equipment manufacturer based in Palo Alto, California, took the biggest hit of unsecured trade creditors at $30.8 million.  While that amount represents less than one percent of HP's total accounts receivable of $18.12 billion as of July 31, 2011, it constitutes a fairly sizable loss in the world of unsecured trade credit.

LSG Sky Chefs, a division of LSG Lufthansa Service Holding AG based in Germany, is the world's largest provider of airline catering.  Allegis Group Service is a human resources management company and Chromalloy is an aircraft coatings and parts repair company based in Glasgow, Scotland (UK).