The current financial situation of American Airlines serves as a lesson on how filing for bankruptcy can lead to long-term financial strength – and, perhaps more importantly for the airline, how avoiding bankruptcy can sometimes cause long-term financial struggles.
Of course, every individual situation is unique and the American Airlines model can’t be applied across the board. But for people teetering at the edge of their finances wondering whether personal bankruptcy could have any benefits down the road, the story of American Airlines is worth considering.
In the months and years immediately after the terrorist attacks of September 11, 2001, Americans flew less and many airlines struggled to remain profitable. In the ensuing years, many of them (including Delta, Northwest, US Airways and others) filed for Chapter 11 bankruptcy protection, which allowed them to reorganize their finances and debts.
American Airlines did not choose bankruptcy; instead, the airline opted to negotiate benefits and salaries with its employees and managed to continue operating. At the time – and, according to some reports, even today – the airline’s CEO was proud of his company’s ability to stay out of bankruptcy court. But some analysts are questioning whether the decision made sense financially.
Today, American Airlines operates at a loss. In fact, sources note that the airline:
- Has more than $12.1 billion in outstanding debts;
- Is saddled with a pension liability (for which it has no funding) of about $7.9 billion;
- Earned $11.6 billion last year but had a net loss of $716 million;
- Is expected to report a $132 million loss for 2011’s third quarter; and
- Recently took on a high-interest (8.75 percent) loan for about $726 million.
These numbers are particularly gloomy when compared with those of the nation’s other leading airlines, most of which are currently operating at a profit, according to sources. In fact, comparisons between American Airlines and its competitors show stark differences.
In addition to having the least fuel-efficient fleet of planes in the country (which sources estimate cost it as much as $400 million in extra fuel expenses per year), American pays its staff more per flight hour than other airlines. One analyst estimates that if American could cut its per-flight-hour operating costs to those of US Airways, the airline would save $2.2 billion per year.
So how have other airlines managed to do so well in a struggling industry? Most of them filed for bankruptcy – and reemerged as stronger, more profitable companies.
Emerging Stronger from Personal Bankruptcy
For corporations, Chapter 11 bankruptcy provides the rare opportunity to renegotiate contracts with venders, employees and unions. Most companies also sell of unused assets and devise a court-approved way to be able to make a profit while treating all of their creditors fairly.
Like airlines, individuals can use the power of the bankruptcy court to introduce positive financial change into their lives. Bankruptcy may offer several unique protections and opportunities not offered by common debt elimination alternatives, including:
- Full discharge of certain debts, meaning that the court legally excuses filers from paying them;
- A temporary halt to collection actions, which can give filers breathing room to take control of their finances; and
- Financial management and credit counseling resources so filers can learn to establish and maintain financial habits that will improve their overall finances.