After three years of losses, AMR Corporation, the parent company of American Airlines, filed for Chapter 11 bankruptcy.
Which Chapter is Worse?
Bankruptcy tends to strike fear into the heart of a responsible LearnVester, but Chapter 11 is less scary than it sounds. Consider it a pause button on business as usual. Chapter 11 (named after its chapter in the bankruptcy code) allows a company to continue operating on court-approved, readjusted debt terms, such as lower interest rates.
Since it won't relieve the company of its obligations but will allow them to be rearranged, Chapter 11 bankruptcy is also known as "rehabilitation bankruptcy." Companies can re-file for Chapter 11 bankruptcy multiple times, but if their rehab was ineffective and their problems grow, they often file for Chapter 7.
If Chapter 11 bankruptcy is the pause button, then Chapter 7 is spontaneous combustion. Chapter 7, also known as "liquidation bankruptcy," is filed when a company is in such serious trouble that it can't continue operating as usual, and has to sell its assets for cash. As its assets are liquidated, the company attempts to pay off its secured creditors—those with legal, written claims on their investment, such as mortgage lenders. Because the company is hustling to pay off large-scale claims, stockholders usually don't see any of the cash. Investments in a company that files for Chapter 7 can usually be considered worthless.
While Chapter 11 bankruptcy certainly isn't good news, a company hasn't "gone under" until it files for Chapter 7.
American Airlines Is One of the Last Holdouts
In filing, American is following in the footsteps of Delta, Northwest, United and US Airways, which have all submitted to Chapter 11 bankruptcy proceedings over the last decade. Currently, Southwest Airlines is the only major U.S. airline that has not filed. After major airlines such as Continental and United (as well as Delta and Northwest) staged mergers as part of their restructuring, they were able to once again become profitable and to operate at much lower costs than American.
American continued to function throughout this time, but was recently unable to renegotiate its labor contract (which stalled with the pilot's union) and its debt structure. The court has more legal flexibility in restructuring than an individual company, which means that it will likely rearrange American's obligations in a way the company wouldn't be able to. For example, even if a company can't convince a labor union to come around, the union has to do what the court says.
Does This Mean I'll Miss My Flight?
In short, no.
American Airlines will continue to operate as usual on a day-to-day basis. Miles will be preserved, planes will fly as scheduled and delays will frustrate as always. It has been speculated, though, that fliers will temporarily steer clear of the airline while it struggles through bankruptcy, which will spur the company to offer sales and promotions to attract more fliers. In fact, unless you're a shareholder, this filing could work out well for your personal finances!
The only difference in AA's operation is on a large scale—the company’s stock price has plunged 79% this year, and major operational decisions will have to be approved by a bankruptcy court. In the long term, it's expected that American will recover, partner with smaller airlines to lower its costs and continue to put us in the increasingly tiny middle seat like other airlines everywhere.
Bankruptcy is never good news, but you’ll still get home for the holidays.
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Image Credit: Sky Scanner