SFGate Article
How American dodged Chapter 11
Kathleen Pender Tuesday, April 1, 2003
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How was American Airlines able to avert bankruptcy -- at least for the moment -- while United Airlines, which had a similar cost structure and faced many of the same problems -- could not?
The answer boils down to management, money, motivation and timing.
Some experts say American''s leaders were able to steer the company clear of Chapter 11 because they had far more experience in the turbulent airline industry than United''s management.
Donald Carty, chief executive officer of American parent company AMR, has spent most of his career at the nation''s largest airline. A protege of storied American chief Robert Crandall, Carty has been AMR''s chairman, president and CEO since 1998.
Since 1998, United parent UAL Corp. has had four CEOs, three from outside the airline industry.
UAL''s current CEO, Glenn Tilton, spent most of his career in the oil business before joining UAL in September. The previous CEO, Jack Creighton, came from the forest products industry and was with United less than a year.
Creighton''s predecessor was Jim Goodwin, a United veteran who served as CEO for less than two years. Before him came Gerald Greenwald, a former executive with Chrysler and Ford.
It''s been a revolving door at United, says Bill Haug, an American pilot who flies out of the Bay Area. They''ve just been adrift.
Although Haug, who has been promoting an employee takeover of American, is no fan of management, he says Carty has been relatively consistent, and has come up with a rational plan for getting us out of this.
Haug points out that AMR''s top management also has a bigger financial stake in their airline.
AMR officers and directors as a group owned 6.9 percent of the company''s stock, as of the April 2002 proxy statement. Carty alone owned 3.6 million shares, or 2.3 percent.
At UAL, officers and directors as a group owned only 3 percent of the stock,
with no individual owning more than 1 percent, as of the March 2002 proxy.
In a bankruptcy, stock almost always becomes worthless.
American''s longer-tenured leaders also may have had more pension money at risk if the airline filed for bankruptcy.
Although both airlines were devastated by the Sept. 11 terrorist attacks, American had more financial flexibility prior to (the attacks), says Richard Bittenbender, a bond analyst with Moody''s.
United started losing money before American. American also had more unencumbered assets, meaning it had more assets it could borrow money against. And it had more cash.
They both got sick, but United was weaker to start with and so it failed, says Bittenbender.
Many observers said UAL would never file for bankruptcy because its employees, excluding flight attendants, owned as much as 55 percent of the company. Despite their majority ownership, United employees had only three of 12 board seats.
United never was able to get all three of its unions to agree to the concessions it said it needed to avoid bankruptcy.
But it wasn''t labor alone that pushed United into Chapter 11.
On Dec. 4, the federal Air Transportation Stabilization Board refused to guarantee a $1.8 billion loan UAL needed to pay off $920 million in debt due the following week.
The board said the company''s business plan was not fiscally sound and was based on unreasonably optimistic revenue projections.
United filed for Chapter 11 on Dec. 9. It is working with its unions and creditors on a reorganization plan and hopes to emerge from bankruptcy.
American didn''t apply for a federal loan guarantee before the window of opportunity closed. Depending on who you talk to, this is because American management thought their business would improve or because they didn''t think AMR would qualify for a federal loan because it still had access to the credit markets when the application deadline passed.
AMR is not in imminent danger of defaulting on any loans. At year''s end, it had unrestricted cash and investments of $1.9 billion. It also expects to receive a cash tax refund of more than $550 million.
However, because of its current financial situation, the airline is expected to violate a bank covenant on June 30, which would force it to immediately pay off $834 million in loans.
Unless American has secured substantial labor savings by then, the banks probably would not defer the payments, which could force AMR to file for bankruptcy.
If bankruptcy were a certainty, AMR would be better off filing now while it still has a tidy pile of cash rather than waiting until June. That''s why AMR reportedly said it might file for bankruptcy this week if its unions didn''t agree to a total of $1.8 billion in cost savings by Monday.
American wanted to avoid the fate of United, which is why they were going to file for bankruptcy earlier rather than later while they still had more liquidity, says Raymond Neidl, a stock analyst with Blaylock & Partners. He does not own stock in American and his firm doesn''t do banking business with the airline.
American announced late Monday that the leaders of its three main unions have agreed to the necessary cuts. The agreements still have to be approved by union members.
If the agreements are ratified, American still could be forced into bankruptcy if the airline industry continues to deteriorate.
For now, however, bankruptcy seems to have been averted.
Bittenbender says that American may have gained an advantage from the experiences of United and US Airways, which filed for bankruptcy in August.
This is a case where being first isn''t a good thing. The unions at US Air and United said, ''We''re not going to accept pay cuts,'' and the eventual result was a bankruptcy, he says. It''s a case of the first time shame on you, the second time shame on me and third time -- maybe you shouldn''t be there.
I think the last paragraph pretty much sums it up for us!!!
How American dodged Chapter 11
Kathleen Pender Tuesday, April 1, 2003
--------------------------------------------------------------------------------
How was American Airlines able to avert bankruptcy -- at least for the moment -- while United Airlines, which had a similar cost structure and faced many of the same problems -- could not?
The answer boils down to management, money, motivation and timing.
Some experts say American''s leaders were able to steer the company clear of Chapter 11 because they had far more experience in the turbulent airline industry than United''s management.
Donald Carty, chief executive officer of American parent company AMR, has spent most of his career at the nation''s largest airline. A protege of storied American chief Robert Crandall, Carty has been AMR''s chairman, president and CEO since 1998.
Since 1998, United parent UAL Corp. has had four CEOs, three from outside the airline industry.
UAL''s current CEO, Glenn Tilton, spent most of his career in the oil business before joining UAL in September. The previous CEO, Jack Creighton, came from the forest products industry and was with United less than a year.
Creighton''s predecessor was Jim Goodwin, a United veteran who served as CEO for less than two years. Before him came Gerald Greenwald, a former executive with Chrysler and Ford.
It''s been a revolving door at United, says Bill Haug, an American pilot who flies out of the Bay Area. They''ve just been adrift.
Although Haug, who has been promoting an employee takeover of American, is no fan of management, he says Carty has been relatively consistent, and has come up with a rational plan for getting us out of this.
Haug points out that AMR''s top management also has a bigger financial stake in their airline.
AMR officers and directors as a group owned 6.9 percent of the company''s stock, as of the April 2002 proxy statement. Carty alone owned 3.6 million shares, or 2.3 percent.
At UAL, officers and directors as a group owned only 3 percent of the stock,
with no individual owning more than 1 percent, as of the March 2002 proxy.
In a bankruptcy, stock almost always becomes worthless.
American''s longer-tenured leaders also may have had more pension money at risk if the airline filed for bankruptcy.
Although both airlines were devastated by the Sept. 11 terrorist attacks, American had more financial flexibility prior to (the attacks), says Richard Bittenbender, a bond analyst with Moody''s.
United started losing money before American. American also had more unencumbered assets, meaning it had more assets it could borrow money against. And it had more cash.
They both got sick, but United was weaker to start with and so it failed, says Bittenbender.
Many observers said UAL would never file for bankruptcy because its employees, excluding flight attendants, owned as much as 55 percent of the company. Despite their majority ownership, United employees had only three of 12 board seats.
United never was able to get all three of its unions to agree to the concessions it said it needed to avoid bankruptcy.
But it wasn''t labor alone that pushed United into Chapter 11.
On Dec. 4, the federal Air Transportation Stabilization Board refused to guarantee a $1.8 billion loan UAL needed to pay off $920 million in debt due the following week.
The board said the company''s business plan was not fiscally sound and was based on unreasonably optimistic revenue projections.
United filed for Chapter 11 on Dec. 9. It is working with its unions and creditors on a reorganization plan and hopes to emerge from bankruptcy.
American didn''t apply for a federal loan guarantee before the window of opportunity closed. Depending on who you talk to, this is because American management thought their business would improve or because they didn''t think AMR would qualify for a federal loan because it still had access to the credit markets when the application deadline passed.
AMR is not in imminent danger of defaulting on any loans. At year''s end, it had unrestricted cash and investments of $1.9 billion. It also expects to receive a cash tax refund of more than $550 million.
However, because of its current financial situation, the airline is expected to violate a bank covenant on June 30, which would force it to immediately pay off $834 million in loans.
Unless American has secured substantial labor savings by then, the banks probably would not defer the payments, which could force AMR to file for bankruptcy.
If bankruptcy were a certainty, AMR would be better off filing now while it still has a tidy pile of cash rather than waiting until June. That''s why AMR reportedly said it might file for bankruptcy this week if its unions didn''t agree to a total of $1.8 billion in cost savings by Monday.
American wanted to avoid the fate of United, which is why they were going to file for bankruptcy earlier rather than later while they still had more liquidity, says Raymond Neidl, a stock analyst with Blaylock & Partners. He does not own stock in American and his firm doesn''t do banking business with the airline.
American announced late Monday that the leaders of its three main unions have agreed to the necessary cuts. The agreements still have to be approved by union members.
If the agreements are ratified, American still could be forced into bankruptcy if the airline industry continues to deteriorate.
For now, however, bankruptcy seems to have been averted.
Bittenbender says that American may have gained an advantage from the experiences of United and US Airways, which filed for bankruptcy in August.
This is a case where being first isn''t a good thing. The unions at US Air and United said, ''We''re not going to accept pay cuts,'' and the eventual result was a bankruptcy, he says. It''s a case of the first time shame on you, the second time shame on me and third time -- maybe you shouldn''t be there.
I think the last paragraph pretty much sums it up for us!!!
