September 26, 2011
By: John Clark
American Airlines is rumored to be considering bankruptcy in order to restructure a labor agreement the company perceives as unfair and remain competitive in an industry that has seen a decade of struggles.
A recent article in Forbes magazine addressed the struggles of the airline giant to reduce its labor costs in order to continue competing with other airlines, such as Southwest, US Airways, and United Continental, with better labor deals.
According to the report, American Airlines has denied speculation it might file Chapter 7 bankruptcy, which would allow it to liquidate some assets to meet its debt obligations. Instead, the company may seek Chapter 11 bankruptcy protection in an effort to reorganize its debts.
Industry analysts claim that the company's employees have ranked very poorly in tests of productivity. This low productivity might be costing American Airlines around $800 million per year in avoidable costs.
Some fear that American Airlines could follow in the footsteps of other major airlines, including Delta and United Continental, which filed for bankruptcy in recent years in order to settle disputes between unions and management.
One feature of Chapter 11 bankruptcy is that it gives companies the ability to renegotiate deals with unions after filing bankruptcy in order to achieve more financial flexibility.
While American Airlines would likely prefer to settle a new deal with labor unions outside of bankruptcy court, harsh economic realities have pushed the company to consider more drastic alternatives.
Sources indicate that employees' wages and benefits account for roughly 31 percent of all operating costs at American Airlines. This puts the company at a serious disadvantage compared to the labor obligations of its competitors, which typically amount to just 22 or 23 percent of all operating costs.
Bankruptcy, however, is not an inevitable outcome for the company. American Airlines is trying to compensate for its relatively high labor costs by reducing other expenses.
Efforts at cost reduction have included entering new partnerships with international carriers and replacing older plans with new models that have much better fuel efficiency.
Still, in the cutthroat world of modern airlines, where profits have proved as elusive as an on-time landing, the company may soon see bankruptcy as its only option to restructure the way it operates.