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Employees Expected to ‘Bear the Burden’ of American Airlines Bankruptcy

November 29, 2011 at 12:00 AM EDT
After 81 years of flying, American Airlines landed in federal bankruptcy court Tuesday, filing for Chapter 11 protections against its creditors. Judy Woodruff discusses what's behind the bankruptcy with Ben Mutzabaugh of USA Today.
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JUDY WOODRUFF: After 81 years of flying, American Airlines landed in bankruptcy court today. The company filed for Chapter 11 protection against its creditors.

THOMAS HORTON, American Airlines: It’s a challenging day.

JUDY WOODRUFF: The announcement came from Tom Horton, the new American Airlines chairman and CEO, who took over after Gerard Arpey resigned last night. Horton spoke at Dallas/Fort-Worth International Airport near the company’s headquarters.

THOMAS HORTON: No company ever wants to face a restructuring like this. We have spent 10 years trying to avoid this.

JUDY WOODRUFF: American was the last of the so-called legacy carriers, United, Delta, Northwest and U.S. Airways, to file for federal bankruptcy protection since the 9/11 attacks.

The Chapter 11 filing in New York City cited nearly $30 billion in debt, just under $25 billion in assets, and $4 billion in cash reserves. And Horton cited an array of factors in the decision.

THOMAS HORTON: We also were dealing with a very uncertain global economic climate and high and volatile oil prices. If you look at our labor costs and compare it roughly to the average of the other big legacy carriers, the difference between our contracts and theirs is about $800 million a year. So, that’s a big number.

JUDY WOODRUFF: The airline’s pilots made major concessions in 2003 to keep the company afloat then. But, this time, negotiations with the unions that represent American’s 78,000 workers have stalled.

Today, the president of the Allied Pilots Association, Dave Bates, issued a statement, saying — quote — “While today’s news wasn’t entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way.”

Ultimately, significant job cuts are expected, and stockholders stand to be wiped out. But American said it will be business as usual for air travelers, except for possible schedule reductions. And its frequent flyer program will be unaffected.

At Washington’s Reagan National Airport, those miles earned were on Tim Cloninger’s mind as he left for Las Vegas.

TOM CLONINGER, air traveler: I’m a little bit scared because I have got — flown five million miles with American Airlines. I’m a very good customer of theirs. And I hope I keep my miles. I’m really very surprised about this.

JUDY WOODRUFF: Lena Bansal and Peggy the papillon…

LENA BANSAL, air traveler: Peggy, yes, she is a frequent flyer.

JUDY WOODRUFF: … were heading for Miami Beach.

LENA BANSAL: If they’re not able to get their finances in order, I think it’s pretty much a shame. I think that other airlines are able to keep their books in order.

JUDY WOODRUFF: American now has 18 months to reorganize under the Chapter 11 process.

We take a closer look now at what’s behind the American Airlines bankruptcy with Ben Mutzabaugh. He covers the aviation industry for USA Today and he writes a blog called Today in the Sky.

It’s good to have you with us.

BEN MUTZABAUGH, USA Today: Good to be here.

JUDY WOODRUFF: So, I read that this is the seventh largest bankruptcy in U.S. history by number of employees. American said they tried hard to avoid this. If that’s the case, why did it happen?

BEN MUTZABAUGH: Right.

It was not a surprise that it happened, but it was kind of surprised that it happened now. They have been fighting for almost a decade now to avoid bankruptcy costs. Unlike other airlines, like Delta, like Northwest, like United, that filed bankruptcy after 9/11, American has worked so hard to avoid doing it.

But they got to a point today where they thought that they had kind of — they had seen the writing on the wall. They felt like they were running out of options. They were having a hard time with their labor groups, who want raises, and they face a lot, a lot of debt. And they decided to do it now, while they still had $4 billion in cash reserves that would give them some options once they go ahead with the bankruptcy process.

JUDY WOODRUFF: Was it felt that this bankruptcy was inevitable and that perhaps they should have done this earlier?

BEN MUTZABAUGH: A lot of people say that. Inevitable might be a touch strong.

I think a lot of people thought it was likely, but that it was maybe far enough out in most people’s minds that they might be able to find some, you know, magic Holy Grail to get out of it. But, obviously, that didn’t turn out to be the case. And they did surprise a lot of people by doing it now. I think if it happened next year, people would be like, yes, we knew this was coming. Now here it is. But that they did it now I think is very surprising.

JUDY WOODRUFF: And the reasons the CEO gave, he said it’s not just the debt. He cited the international financial or economic picture. He said global finance. He talked about the rising price of fuel.

Was it all of those factors as well?

BEN MUTZABAUGH: I think that’s believable. You look at a lot of the conditions, we might be looking, some people say, at more economic woes heading into next year, if there was a double-dip recession. With the unrest in the Middle East, what if there’s another spike in oil, especially like we saw in 2008

There’s a lot of uncertainty for the airline industry. And American is particularly vulnerable. If any one of those things really went off the charts, they would feel it really quick, whereas their competitors would be able to wait it out a little bit, a lot longer than American would be.

JUDY WOODRUFF: So now that this has happened, Ben Mutzabaugh, how is the airline going to change?

BEN MUTZABAUGH: Well, that will be interesting to see.

I think, for right now, it will largely be business as usual. They will probably over the long haul or at least over the next few — say, few quarters, they will probably pare some of their worst-performing routes, get rid of some of their least fuel-efficient and most expensive planes, maybe void some leases and renegotiate some leases for aircraft.

But I think what is remarkable about this is you look at the industry since deregulation, since 1978, we could finally be headed for the consolidation that everyone has said was coming for years now, where speculation is U.S. Airways and American might — somehow might be forced to look at a merger with each other to keep up with United and Delta.

And if that happens, that will leave us with three large carriers. That is a far cry from where we were at deregulation.

JUDY WOODRUFF: And if that — I don’t want to get too far down this speculation road here, but if that were to happen, what would that mean for air travel?

BEN MUTZABAUGH: Well, I think whether that happens or not, I think that there are some things that customers will see that is not specific to American. I think we’re going to see fares continue to creep up. That just is — the airlines have pricing power right now. And I don’t foresee anything that will change that in the next year or two.

And we have all gotten used to these packed-full flights. And I just think that’s the new normal.

JUDY WOODRUFF: So you’re saying deregulation can be blamed on a lot of this?

BEN MUTZABAUGH: Well, we’re paying lower fares than we had decades ago. And they’re still historically low, but this is kind of all coming full circle and kind of striking the right equilibrium.

JUDY WOODRUFF: What about — again, back to American in terms of how it will change, we saw the speculation today that employees will be cut. They will have to cut back the work force. What about number of routes? How will that be affected?

BEN MUTZABAUGH: They will probably thin them out. I don’t foresee any big service cuts. A route that might have, say, eight flights a day may drop down to six, or some really weak routes, they might drop a nonstop flight from New York, but still offer connections to it via Chicago, that type of thing.

But I think you’re really right. The employees are really going to — I think are going to bear the burden of this bankruptcy. And a lot of them are going to lose jobs. It will be interesting to see what the new contracts that they get with management. It’s probably going to be worse.

And the big question, if I was an American employee, is, what is going to happen to my pension?

JUDY WOODRUFF: Exactly.

And for many people watching, the question is, what about for travelers, for people who have tickets right now on American Airlines flights?

BEN MUTZABAUGH: There’s not much to worry about. Stay abreast of what’s going on. Your frequent flyer miles are safe. Your flights are safe.

JUDY WOODRUFF: They are safe?

BEN MUTZABAUGH: They are safe.

JUDY WOODRUFF: Because we heard the travelers.

BEN MUTZABAUGH: Right. I mean, no one can say what’s going to happen two years down the road, but as a result of this bankruptcy, flights are safe. Miles are safe. There will be very little impact to the traveler based on today’s news of a bankruptcy filing.

JUDY WOODRUFF: So, if you’re a flyer, a frequent flyer, or not, you really are not going to see much of a change?

BEN MUTZABAUGH: No.

There’s — obviously, it a big story. It gets a lot of headlines. And it is really emblematic of what’s going on in the industry. But the brunt of this will be felt by the employees and not the travelers.

JUDY WOODRUFF: All right, well, we will leave it there.

Ben Mutzabaugh, USA Today, thanks very much.

BEN MUTZABAUGH: My pleasure.