AMR shareholders will be flying coach on this AA flight

American Airlines’ parent corporation, AMR, filed for Chapter 11 bankruptcy protection yesterday in an effort to cut labor costs while shouldering a massive $3.2 billion in debts, resulting in severe losses in shareholder value.

The Texas-based company also announced that CEO Gerard Arpey stepped down and was replaced by Thomas Horton, chairman and chief executive, which marks a significant step in AMR’s restructuring process. Previously, Horton served as executive vice president and chief financial officer.

AMR is the last of the nation’s major airline companies to file for Chapter 11. American was faced with soaring costs and had to struggle with its competitors' lower fares or lose passengers.

AMR had been in contract negotiations with its unions earlier this month but it all came to a sudden halt as the pilots’ union refused to send a proposal to its members for a vote, the New York Times says. This deal would have allowed the airline holding company to pocket $100 million per year.

Over the years, as other airline companies consolidated and competition intensified, AMR drastically increased its borrowing, pledging nearly all of its assets and leaving it heavily indebted. It also sought to reduce expenses, managing to cut $4.1 billion by the end of 2004, the New York Times confirms.

Now shareholders are the ones battered and bruised by AMR’s actions as the board is tasked with devising strategies to help the company pay off its creditors.

‘The conventional approach is to come up with a plan and the biggest losers will be the shareholders,’ says Scott Univer, general counsel of WeiserMazars, a regional accounting and consultation firm. ‘When a firm goes into bankruptcy, the interests of shareholders are subordinate to the interests of creditors, who receive priority.’  

The board still has to uphold its fiduciary duties to the company and its shareholders, but in the case of a bankruptcy, the main goal is paying off the creditors. That leaves the company’s shareholders between a rock and a hard place. ‘Expect to see shareholders' interests not really represented at AMR because major creditors will form a committee and propose a plan that will allow the company to emerge from the bankruptcy (in the event that the debtor is unable to come up with one that gets creditor support) and the board will have to satisfy the desires of the creditors,’ Univer adds.  

For the airline industry, AMR’s move could also lead to an acquisition of the company, which Univer suggests is another way companies can emerge from a bankruptcy. Restructuring cost and dealing with debt will serve American well as an appealing business partner.

In this case, the shareholders may be able to gain some shares in the new company that might provide better cost structures. Some reports indicate American is likely to merge with US Airways, a company already familiar with the bankruptcy process.