American Airlines, the fourth largest airline in the world, might be headed for bankruptcy. Shares of American Airlines parent AMR Corp. (AMR) plunged on Monday, closing down on the day 33% at $1.98, its lowest level in eight years.
American Airlines is considered to be in the weakest financial position of all major carriers in the US. In just the last quarter, AMR had a net loss of $286 million, while many of its rivals were profitable. The reason for this is that American Airlines is the only major carrier that did not restructure in Chapter 11 during the ten years. As a result the airline has operating costs and labor costs that are higher than those of competitors.
As the economy slows down and the potential for another recession looms, many investors are predicting things will only get worse for the troubled airline.
To be clear, this doesn’t mean the company will go out of business. Filing for Chapter 11 would allow American Airlines to reorganize its business under Federal bankruptcy laws so that it can run its operations more effectively. However, if AMR files for Chapter 11 the company’s stock is likely to become worthless, which is why we saw the sell-off in the shares yesterday.
At this point AMR is denying that it is considering Chapter 11. AMR spokesman Andrew Backover said, “Regarding rumors and speculation about a court-supervised restructuring, that is certainly not our goal or our preference. We know we need to improve our results, and we are keenly focused as we work to achieve that.”
For those of you who are concerned about your American Airline frequent flyer miles, don’t fret too much. US Airways, United Airlines, US Airways, Northwest Airlines, and Delta Air Lines all filed for Chapter 11 in the past decade and their customer’s frequent flyer miles were unaffected.
It’s my opinion that AMR will likely be forced to restructure, especially if there is another recession. Losing $286 million in a quarter while their competitors are making money doesn’t give me much hope that Chapter 11 can be avoided.
What do you think? Do you think American Airlines will file for bankruptcy protection? Please leave your comments below.