American Airlines Case Study

Thomas McMahen

Executive Summary-American Airlines

Problem: The problem with American Airlines, which caused them to file for bankruptcy was high fuel prices and labor costs.

Background: American Airlines, founded in 1930, is a major U.S. airline and a subsidiary of AMR Corporation. It is headquartered in Fort Worth, Texas, adjacent to its largest hub at Dallas/Fort Worth International Airport. American Airlines operates an extensive international and domestic network, with scheduled flights throughout North America, the Caribbean, South America, Europe, and Asia/Pacific, which totals 260 destinations.

Discussion/Analysis: American Airlines declared Chapter 11 bankruptcy in 2011. The reasons for this were their need to cut costs, due to a weak global economy, a credit downgrade that raised borrowing costs, and high, volatile fuel prices. The cost of jet fuel had risen more than 60% in the past 5 years. The reason for filing Ch. 11 bankruptcy was need for removing dead weight and starting fresh again while still being able to continue business. American had 29.6 billion in debt and 24.7 billion in assets.

One major element in almost every airline bankruptcy is the rejection by the debtor of its current collective bargaining agreements with employees. Severin Borenstein, an economist at UC Berkley, has spent years studying the Airline Industry. In regards to bankruptcy Borenstein believes it can be a positive thing in which he states, "Bankruptcies are a way for capital to reorganize in a more efficient way. It does help to move the industry to a more efficient structure where consumers get good services at reasonable prices and airlines can actually make money, " Borenstein says. "Airlines are never going to consistently make money year after year because it is an industry that is inherently volatile. But I think that as they change they will be more effectively able to overall on average make money." Consolidation has put American Airlines at a...