American Airlines Bankruptcy
Table of Contents
Table of Contents ……………………………………………………………………………........1
Abstract …………………………………………………………………………………………...2
Summary of Events ……………………………………………………………………………….3
Analysis of American Airlines Bankruptcy ………………………………………………………5
Evaluation in the Context of Human Resource Policies ………………………………………...10
Recommendations ……………………………………………………………………………….13
Conclusion ………………………………………………………………………………………16
References ……………………………………………………………………………………….17
Abstract
In order to fully understand the dynamics of the American Airlines bankruptcy, it is important to consider the events leading up to the bankruptcy declared by the airline. It is also important to consider American Airlines as an entire …show more content…
company. The human resource policies that are presently used within the company also play a role in the current situation of American Airlines. This report fully analyzes the history of American Airlines and the way that bankruptcies affect the airline industry in general. The report also offers recommendations that American Airlines should consider in order to recover from the bankruptcy.
Summary of Events
Before analyzing the American Airlines bankruptcy case in depth, it is important to understand what events contributed to the bankruptcy. By analyzing what events contributed to the failure of the airline, it will be easier to understand how this can be prevented by another airline in the future. It is also important to analyze other bankruptcy cases that are similar to American Airlines. Developing a complete understanding on the different economic and managerial factors that contributed to the demise of American Airlines is essential to the overall understanding in the series of events that occurred.
One of the main events that contributed to the bankruptcy of American Airlines is the frequency of other airlines declaring bankruptcy. For example, according to Josh Sanburn’s article, American Bankruptcy, “until late November, American Airlines was the only remaining major airline to have avoided Chapter 11 in recent years. Its main competitors, Delta and United, had used bankruptcy to save billions of dollars, renegotiate labor contracts and, with the help of mergers, return to profitability,” (Sanburn, 1). Many of American Airline’s competitors were declaring bankruptcy in order to restore to the current state that many of its competitors had achieved through the declared bankruptcy. According to the article, American Airline’s competitors, Delta and United, were able to ironically stay in business due to their decision to file for Chapter 11 bankruptcy. This is interesting, but it also shows that American Airlines has the ability to recover from their current state. Both of the competition airlines, Delta and United, were able to return to profitability through their decision, but “American, on the other hand, has lost money in all but two quarters in the past four years, for a total of nearly $5 billion in red ink,” (Sanburn, 1). This shows that even though American Airlines was attempting to avoid this situation, they were not able to recover financially and as a company, American Airlines was not able to keep from filing bankruptcy. The article explains that American Airlines lost almost all of its money in just two quarters. The article also goes on to explain that American Airlines lost 79% of its funds in just four years. That is a huge amount of money, and this shows that the company is extremely weak, and is in need of a serious overhaul.
It is important that managers understand the dynamics of this bankruptcy, because it will certainly affect how the company as a whole operates. Obviously, certain factors about the company must change, and without the proper changes, American Airlines will continue to suffer. The entire infrastructure of the company must be changed, but in a way that will allow American Airlines to become profitable. For example, Josh Sanburn’s article speculates that significantly cutting routes or raising fares will not solve the problems of American Airlines. Instead, Rick Seaney, a co-founder and the CEO of FareCompare.com, predicts that “additional bonus programs from American [will be created to] hang on to elite travelers [and] some flyers could see a decrease in fares in American 's secondary markets, like Boston, Las Vegas and Orlando, where the airline will try to lure passengers with more competitive prices,” (Sanburn, 1). This is an important thing to note, because specific managerial decisions will need to be made in order to allow this decision to be profitable for American Airlines. Without designing a specific program, there is no way that American Airlines will be able to recover from its current state.
Throughout this report, it will be easy to highlight the exact reasons that American Airlines slipped into a state of bankruptcy. The report will also deliver various ideas for solutions that will help American Airlines recuperate from various losses incurred throughout the years. It is important for American Airlines to exercise strong managerial practices in order to recover from its current state.
Analysis of American Airlines
AMR Corporation, the parent company of American Airlines, filed for chapter 11 bankruptcies after being unable to bridge the gap between their costs and revenue. The airline failed to secure cost-cutting labor agreements and sat out a round of mergers that caused American Airlines to drop from the largest airline to the third largest in the United States. With the filing, American became the last of the so-called U.S. legacy airlines to seek court protection from creditors (Milford). The Fort Worth, Texas-based company, which traces its roots to 1920s air-mail operations in the Midwest, listed $24.7 billion in assets and $29.6 billion in debt in Chapter 11 papers filed on November 29, 2011 in U.S. Bankruptcy Court in Manhattan (Milford). Horton, President of AMR, said “the economic climate has been most uncertain, oil prices remain high and volatile, and all of that taken together led to the conclusion that now is the right time to take this step and put the company back on the path to long-term success.” AMR was determined to avoid Chapter 11 as air travel fell and losses mounted after the 2001 terrorist attacks, even as peers used bankruptcy to shed costly pension and retiree benefit plans and restructure debt. Rival carriers later combined, giving them larger route networks that were more attractive to lucrative corporate travel customers (Milford). The bankruptcy decision was caused by the attacks at 9/11 that led people to decrease air travel, financing terms and availability, currency exchange rates, the current inconsistency and volatility of oil prices, and the downturn in economic stability and growth rates.
American Airlines sponsors four defined benefit pension plans covering nearly 130,000 workers and retirees. While these plans are insured by the Pension Benefit Guaranty Corporation, American Airlines is responsible to pay benefits owed under its four pension plans on its own (PBGC.gov). These plans are ongoing and PBGC is doing its absolute best to ensure that American maintains responsibility for the plans and keeps the pension promises it has made to employees. By doing this, people who are counting on those plans can receive their full plan benefits, without regard to the limits in the pension law and PBGC will not be forced to pick up obligations that AMR really can afford. The Pension Benefit Guaranty Corporation is actively involved in the bankruptcy, both directly and as a member of the Committee of Unsecured Creditors (PBGC.gov). On April 20, 2012, in response to news of a possible American Airlines merger with US Airways, PBGC Director Josh Gotbaum said: “We’re continuing to work for a strong airline that offers dependable air service, provides jobs, and preserves its pensions. In order to get the best resolution for everybody, all options should be on the table” (PBGC.gov).
Due to the massive deficit and current economic situation, the PBGC has taken the role as a sort of monitor of the situation. For the PBGC, it is a battle to avoid, or at least minimize the damage from, what promises to be the largest claim in agency history. If they were to take over all four of American Airlines’ plans — for pilots, flight attendants, agents and ground crews — it would give the PBGC $18.5 billion in liabilities but just $8.3 billion in assets, creating a $10.2 billion difference. PBGC benefit limits would cap the claim at $9 billion, leaving roughly $1 billion in benefits unpaid (Bradford). While they are seeking to protect the pension benefits of the American Airlines employees, they are not in a position to pick up all the monetary promises and are instead forcing AMR Corporation to exhaust any alternative to the destruction of pension plans.
Similarly to American Airlines, United Airlines was forced to file chapter 11 bankruptcy following the terrorist attacks of 2001. Two out of the four airplanes hijacked belonged to United Airlines and the repercussions were astronomical. An airline industry downturn resulted, and coupled with economic difficulties, skyrocketing oil prices, and higher labor costs, the company lost $2.14 billion in 2001. After attempts to secure additional capital failed, UAL Corporation filed for Chapter 11 bankruptcy protection in December 2002 and the ESOP was terminated. Since June of 2005 when PBGC assumed responsibility for the United Airlines pension plans, almost 125,000 out of 126,000 participants and retirees have received Benefit Determination Letters. They hoped to issue the remaining letters, but they are currently performing asset valuations and recalculating the asset allocation for the United Airlines’ pension plans, which may cause final benefits to change slightly. The total number of BDs remaining to be issued, which stands at approximately 1300 will be distributed towards the Pilots Fixed Benefit Income Plan (400), Ground Employees ' Retirement Plan (300), Management, and Administrative & Public Contact (MAPC) Pension Plan. It has been said that The PBGC 's handling of defined benefit plans terminated by United Airlines in 2007 and 2008 was “seriously deficient,” according to a new report from the agency 's inspector general (Bradford). The PBGC will correct any errors and pay the overdue amount with interest, according to the statement. As of right now, this scenario is very similar to American Airlines because both bankruptcies stemmed from the same issues that the airline industry has been facing. While the American Airlines case is still very new, it can be seen that this will take years to settle due to the huge amount of liabilities and debt that the PBGC is facing.
This case scenario also occurred with Aloha Airlines in 2005. The Pension Benefit Guaranty Corporation announced it has assumed responsibility for the pensions of nearly 4,000 employees and retirees of Aloha Airlines Inc. in 2006. The PBGC determined that three Aloha Airlines defined benefit plans ended as of December 14, 2005: the Pilots ' Fixed Retirement Plan, the Pension Plan for Non-Represented Employees, and the Pension Plan for Employees Represented by the International Association of Machinists. According to estimates made by the PBGC, the plans are 55% funded with $190 million in assets to cover the $345 million promised in benefit plans. The PBGC was to be responsible for $117 million of the $155 million shortfall. On February 2, 2006, the court approved a settlement between Aloha and the PBGC providing for termination of the three plans. The settlement also provides that a fourth Aloha plan, the Pension Plan for Dispatchers, will remain ongoing under the company 's sponsorship.(PBGC.gov) In this case the PBGC allowed for some termination of plans and provided a massive amount of money to make up for the shortfall. This is a bit different from American Airlines because the PBGC deemed them to be financially incapable of taking on responsibility of their outstanding benefits. Unlike American Airlines, Aloha Airlines was a smaller firm that had already stressed their assets completely. American Airlines will need to pick up a lot more of the responsibility based on their history and assets on hand currently.
In 1990, Continental Airlines filed for protection from its creditors under chapter 11 bankruptcy. They attributed this action to the jump in fuel prices that resulted from the crisis in the Persian Gulf and the cost of interest on its huge debts. The settlement that the Pension Benefit Guaranty Corporation reached with Continental Airlines over claims for the Eastern Air Lines pension liabilities and Continental 's own pension plans was approved on Sept. 16, 1992, by the U.S. Bankruptcy Court for the District of Delaware. Under the settlement, valued at $115 million to $130 million, PBGC received $24 million in cash, a secured note for $75 million backed by beneficial ownership of an airline trust, an unsecured claim of $375 million and $10 million in stock of the reorganized Continental, backed by a cash guarantee, that will go to Continental 's ongoing pension plans (Schneider). Continental also transferred 15 airplanes to the trust, of which PBGC was the beneficiary, and leased the planes to Continental. The note was secured by the airplanes and the leases. The residual value of the planes was also guaranteed by Continental Airlines.
The major difference in the American Airlines case is that there is a lot of suspicion regarding their current assets. As a company that has endured the harshest economic times, the PBGC is being very thorough in how the evaluate AMR’s ability to pay their pension plans. Unlike Aloha Airlines that was a tiny carrier out of Hawaii, American Airlines has holds all over the globe. Despite this, AMR is giving the PBGC a great amount of difficulty in coming to a conclusion on what they can, or what seems to be the case, what they are willing to provide in terms of finances. These cases are greatly similar due to the fact that they are all based around the airline industry and rely on a compromised settlement between the corporation and the PBGC.
Evaluation in the Context of Human Resource Policies
American Airlines recently filed for bankruptcy leaving the airline community in shock. They were the last of the major domestic airlines to file for bankruptcy. There is much doubt amongst the employees and customers in response to this Chapter 11 bankruptcy filing. In previous cases, such as those of United Airlines, Aloha Airlines, and Continental Airlines, they have had to terminate their pension plans as well as have a loss of loyal employees. However, many of these airlines like Delta and United have come back better and stronger than ever. American has four defined pension benefit plans within their employee packages covering over 100,000 employees and retired persons. They are responsible for paying the benefits owed to all employees. The job of the PBCG is to ensure that American Airlines keeps its promises to their employees and pay what is owed to them. The maximum benefit PBGC can pay American employees is $54,000, the maximum allowed by law (PBGC.gov). Unlike the rest of these airlines, American Airlines has been trying to do their best in order to keep their pension plans as well as all of their customers. Throughout this crisis they have made sure to handle all issues thrown at them. The PBGC is making sure that it is their last duty to eliminate any plans that could affect 130,000 employees and retirees (PBGC.com). AMR, the parent company of American Airlines, is trying to cut pension plans because of examples set by other airlines, but AMR needs to prove that cutting the pension plans is the only way they can stay in business, it’s the law. It is not the intent or responsibility of AMR to decide what pensions will be cut. AMR believes that the pensions have to go in order to recuperate “rightful place at the top of the industry” (PBGC.gov). In fact, many companies have successfully restructured themselves without ending their retirement pension plans; some of which were also in the airline industry. Northwest and Continental both emerged from debt still holding onto pension plans. Therefore, it is possible to have American Airlines prosper the same way. AMR has said that unless the pension plans are terminated, American Airlines will have to find $800 million a year to pay for these plans. AMR obtained pension relief from Congress “that allowed the airline to reduce and defer pension payments” (PBGC.gov). This tactic helped American Airlines save more than $2.1 billion over the last half a decade. The money borrowed from these pensions has contributed to funds that helped keep American Airlines in the air. AMR claims that these pension costs are too expensive for them to handle. To the contrary the pensions will only be half of the $800 million in six years. AMR also believes that employees will not feel the wrath of a pension plan cut, but retirees would lose at least $1 billion in retirement plans and some health care benefits if the PBGC doesn’t help this company. American Airlines doesn’t want to scare away their customers just as much as they don’t want their employees to think they are uncared for.
Even before the announcement of American Airlines filing for bankruptcy they made sure to interact with their customers before they even got a chance to experience the harms incurred by the crisis. Some steps American Airlines took to ensure top customer satisfactions throughout this harsh time were taken on and offline. American Airlines first emailed all their loyal American Advantage Rewards members explaining their decision on filing for bankruptcy. These emails were sent before anything was in the news, on twitter, or on Facebook. Another step this airline took was putting a top banner on their American Airlines Homepage promising customers that business was as usual and flights would not be interrupted. This also meant that reward miles could still be used or managed. In minutes, customers could also be connected with an operator on the customer service line. Customers who spoke to these operators were insured that their miles were safe and they genuinely thanked each caller for being a loyal customer. (Ester Rae
Marketing). Online, American Airlines posted a video via Facebook showing that this decision can and will be a positive change in the future. Customers “liked”, “shared”, and “commented” on this video showing support for the company. On the American Airlines twitter page, the airline responds to all loyal customers and makes sure they are satisfied with this means of transportation (Ester Rae Marketing). American Airlines wants to ensure that each customer knows that they remain deeply committed to delivering outstanding service and meeting travel needs with the same standards of safety, security, and reliability customers have come to expect. Travel packages are still available for those customers that qualify. American Airlines is putting all efforts into making sure that there are no immediate changes to service, schedules, or flights. All tickets will be honored and all reservations will be fully intact. In addition, policies regarding exchanges and refunds will remain the same. American Airlines remains committed to providing a superior customer experience with a focus on delivering what their customers value most. The American Airlines team is dedicated to working as quickly and efficiently as possible to restructure their company so they can emerge from chapter 11 stronger and more competitive than ever.
Recommendations Bankruptcy is a way of life for airline industries and it is now American Airlines’ turn to cope with these challenges. It seems as though American Airlines must change the entire infrastructure of the company that would allow them to be profitable in the future. Without the proper change the entire company would continue to suffer and they will be seen as extremely weak compared to their counterparts. American Airlines has the ability to recover just like Delta and United were able to do, but only if they follow specific managerial decisions in order to be successful. It is very important for American Airlines to implement strong managerial practices in order to bounce back from this bankruptcy filing.
American Airlines was the last major domestic airline to file for bankruptcy, but this decision will allow them to reduce their costs, re-write the contracts with their pilots and flight attendants, and find ways to reduce their debts. American Airlines is said to be at a disadvantage because their costs are so high compared to their rivals. As with most bankruptcy in the airline sector, most airlines still operate with relative ease. American airlines will need to recognize the problem, return to profitability, settle their debts and eventually be released from bankruptcy. However, in order to get out of this situation, they must take the necessary steps to return to a top-tier airline.
American Airlines shouldn’t do anything drastic such as raising their fare or cutting out certain routes all over the globe. The airline must figure out ways to hang on to repeat travelers as well as valuable employees. A potential way of doing this was previously mentioned by Joshua Sanborn’s article, in that they should implement additional bonus programs, and try and lure passengers away from competitors, while maintaining their own.
Since American Airlines sponsors four defined pension benefit plans to workers and retirees, the company must stay responsible and pay off these benefits owed. The Pension Benefit Guaranty Corporation is doing everything they can to force American Airlines to maintain the responsibility of keeping their promise to employees. Employees expect full plan benefits, without regard to limits of the pension law, and American Airlines should be obligated to pay these plans off without hurting the reputation they have with their customers.
American Airlines is said to continue to fly scheduled flights while honoring tickets and reservations. In order to sustain customers, they must continue to operate as if nothing had happened. Even though filing for chapter 11 bankruptcies is the last legal step before liquidation, this does mean that American Airlines cannot fight through and be profitable.
In 2005, Delta Air Lines plunged into bankruptcy. Delta today can be seen as the model airline that took on bankruptcy and came out “the picture of health” (Foust). Thanks to management overhaul, cost cutting, more profitable routes, and a merger they were able to prevail as what many see as the top air carrier today. This transformation took five years, but it came out with “the best balance sheets, the best route structure, and the best prospects of future profitability” (Foust). In order for Delta to get back on track, they had a willingness to part with management and employees. Trying to convince pilots to take pay cuts was a huge sacrifice that paid dividends in the long run of the company. The new CEO of Delta later donated his bonus to a scholarship fund for employees. Some of these solutions should be recommended for American Airlines.
American Airlines lost almost all of its monetary assets in the last two quarters as well as losing a substantial amount of money over the last few years. They are in such debt that change must happen and it must happen instantly. A complete overhaul might not be necessary; however, a willingness for management and employees alike to make sacrifices in their pay in order to remain in the game is necessary. By asking pilots, top-level managers, and employees to take pay cuts it will help the company stay afloat until they start paying off debts, pension plans, and begin making a profit again. Managers like Gerald Grinstein of Delta Air Lines made the right choice when he received his bonus. He instantly gave that money to a scholarship fund for his employees’ children. Actions like that go a long way and should be mirrored by American Airlines because if you make your employees happy, they will be more apt to stay on board even through a tough time like a bankruptcy.
In the short term, American Airlines might have fewer flights, fewer routes, and fewer employees for the company and potentially a smaller American Airlines. Depending on how they emerge from this bankruptcy, they could come out as a stronger competitor just like their rivals, Delta and United did. Growth plans in the future might include more planes in order to build the airline into an even bigger and more efficient American Airlines than ever before.
American Airlines must make sure that their corporate culture stays relaxed at a stressful time. It is very difficult to come up with a conclusion on how to deal with certain situations like the pension plan cases. However, American Airlines remains deeply committed to provide a safe and secure airline for years to come. It is important for American Airlines to make specific managerial decisions and practices in the best interest of the entire company in order to be profitable and successful in the future.
Conclusion Overall, it is important to consider all of the relevant factors that contributed to the bankruptcy of American Airlines. Without analyzing all of the relevant factors, it would be impossible to conclude exactly why the bankruptcy occurred. Overall, the frequency of other airlines declaring bankruptcy contributed to the demise of American Airlines. Other airlines were able to recover from their bankruptcy, and this contributed to their success in the end. With any sort of radical change within a company, it is important to consider how changes affect employees. In order to be sure that employees are appropriately taken care of, the current human resource policies must be considered when a major decision regarding a company is made. In the case of American Airlines, the bankruptcy has the ability to affect their four defined pension plans. These pensions plans must be considered when the financial situation of the company is assessed. Overall, the bankruptcy of American Airlines will affect the company as a whole. By changing the current policies related to the company, American Airlines has the ability to recover from the current financial state. Without changing the current policies, there is no way for American Airlines to recover. Eventually, the proper changes will allow the employees to flourish within the company and will allow American Airlines to grow.
References
PBGC Assumes Pensions of Aloha Airlines. (2006, April 28). Retrieved from Pension Benefit Guaranty Corporation: A U.S. Government Agency: http://www.pbgc.gov/news/press/releases/pr06-46.html
Pension Benefit Guaranty Corporation: A U.S. Government Agency. (2011, August 31). Retrieved from United Airlines Benefit Determination Status: http://www.pbgc.gov/wr/bulletin/info/bulletin149.html
American Airlines Post Bankruptcy Response: Thumbs Up. (n.d.). Retrieved from Ester Mae Marketing: http://estermaemarketing.com/featured/american-airlines-post-bankruptcy/
American Airlines (AMR) Pensions. (2012, April 20). Retrieved from Pension Benefits Guaranty Corporation: A U.S. Government Agency: http://www.pbgc.gov/wr/other/pg/american-airlines-amr-pensions.html
American Airlines Post Bankruptcy Response: Thumbs Up. Ester Rae Marketing, n.d. Web. 9 May 2012.
Airline Bankruptcies in the United States. (n.d.). Retrieved from Wikipedia: http://en.wikipedia.org/wiki/Airline_bankruptcies_in_the_United_States
Bradford, H. (2011, December 1). PBGC plan valuation problems go beyond United Airlines. Retrieved from Pensions and Investments: http://www.pionline.com/article/20111201/DAILYREG/111209987
Bradford, H. (2011, November 30). Report: PBGC mishandled plan asset values for United Airlines. Retrieved from Pensions and Investments: http://www.pionline.com/article/20111130/REG/111139978
Bradford, H. (2012, February 6). PBGC worthy opponent in AMR bankruptcy fight. Retrieved from Pensions and Investments: http://www.pionline.com/article/20120206/PRINTSUB/302069984
Foust, D. (n.d.). How Delta Climbed Out of Bankruptcy . Businessweek - Business News. Retrieved May 9, 2012, from http://www.businessweek.com/magazine/content/09_21/b4132036798289.htm
Schneider, P. J., & Pinheiro, B. M. (2008). ERISA: A Comprehensive Guide. Austin: Wolters Kluwer Law & Business/Aspen Publishers.
Table of Contents ……………………………………………………………………………........1
Abstract …………………………………………………………………………………………...2
Summary of Events ……………………………………………………………………………….3
Analysis of American Airlines Bankruptcy ………………………………………………………5
Evaluation in the Context of Human Resource Policies ………………………………………...10
Recommendations ……………………………………………………………………………….13
Conclusion ………………………………………………………………………………………16
References ……………………………………………………………………………………….17
Abstract
In order to fully understand the dynamics of the American Airlines bankruptcy, it is important to consider the events leading up to the bankruptcy declared by the airline. It is also important to consider American Airlines as an entire …show more content…
company. The human resource policies that are presently used within the company also play a role in the current situation of American Airlines. This report fully analyzes the history of American Airlines and the way that bankruptcies affect the airline industry in general. The report also offers recommendations that American Airlines should consider in order to recover from the bankruptcy.
Summary of Events
Before analyzing the American Airlines bankruptcy case in depth, it is important to understand what events contributed to the bankruptcy. By analyzing what events contributed to the failure of the airline, it will be easier to understand how this can be prevented by another airline in the future. It is also important to analyze other bankruptcy cases that are similar to American Airlines. Developing a complete understanding on the different economic and managerial factors that contributed to the demise of American Airlines is essential to the overall understanding in the series of events that occurred.
One of the main events that contributed to the bankruptcy of American Airlines is the frequency of other airlines declaring bankruptcy. For example, according to Josh Sanburn’s article, American Bankruptcy, “until late November, American Airlines was the only remaining major airline to have avoided Chapter 11 in recent years. Its main competitors, Delta and United, had used bankruptcy to save billions of dollars, renegotiate labor contracts and, with the help of mergers, return to profitability,” (Sanburn, 1). Many of American Airline’s competitors were declaring bankruptcy in order to restore to the current state that many of its competitors had achieved through the declared bankruptcy. According to the article, American Airline’s competitors, Delta and United, were able to ironically stay in business due to their decision to file for Chapter 11 bankruptcy. This is interesting, but it also shows that American Airlines has the ability to recover from their current state. Both of the competition airlines, Delta and United, were able to return to profitability through their decision, but “American, on the other hand, has lost money in all but two quarters in the past four years, for a total of nearly $5 billion in red ink,” (Sanburn, 1). This shows that even though American Airlines was attempting to avoid this situation, they were not able to recover financially and as a company, American Airlines was not able to keep from filing bankruptcy. The article explains that American Airlines lost almost all of its money in just two quarters. The article also goes on to explain that American Airlines lost 79% of its funds in just four years. That is a huge amount of money, and this shows that the company is extremely weak, and is in need of a serious overhaul.
It is important that managers understand the dynamics of this bankruptcy, because it will certainly affect how the company as a whole operates. Obviously, certain factors about the company must change, and without the proper changes, American Airlines will continue to suffer. The entire infrastructure of the company must be changed, but in a way that will allow American Airlines to become profitable. For example, Josh Sanburn’s article speculates that significantly cutting routes or raising fares will not solve the problems of American Airlines. Instead, Rick Seaney, a co-founder and the CEO of FareCompare.com, predicts that “additional bonus programs from American [will be created to] hang on to elite travelers [and] some flyers could see a decrease in fares in American 's secondary markets, like Boston, Las Vegas and Orlando, where the airline will try to lure passengers with more competitive prices,” (Sanburn, 1). This is an important thing to note, because specific managerial decisions will need to be made in order to allow this decision to be profitable for American Airlines. Without designing a specific program, there is no way that American Airlines will be able to recover from its current state.
Throughout this report, it will be easy to highlight the exact reasons that American Airlines slipped into a state of bankruptcy. The report will also deliver various ideas for solutions that will help American Airlines recuperate from various losses incurred throughout the years. It is important for American Airlines to exercise strong managerial practices in order to recover from its current state.
Analysis of American Airlines
AMR Corporation, the parent company of American Airlines, filed for chapter 11 bankruptcies after being unable to bridge the gap between their costs and revenue. The airline failed to secure cost-cutting labor agreements and sat out a round of mergers that caused American Airlines to drop from the largest airline to the third largest in the United States. With the filing, American became the last of the so-called U.S. legacy airlines to seek court protection from creditors (Milford). The Fort Worth, Texas-based company, which traces its roots to 1920s air-mail operations in the Midwest, listed $24.7 billion in assets and $29.6 billion in debt in Chapter 11 papers filed on November 29, 2011 in U.S. Bankruptcy Court in Manhattan (Milford). Horton, President of AMR, said “the economic climate has been most uncertain, oil prices remain high and volatile, and all of that taken together led to the conclusion that now is the right time to take this step and put the company back on the path to long-term success.” AMR was determined to avoid Chapter 11 as air travel fell and losses mounted after the 2001 terrorist attacks, even as peers used bankruptcy to shed costly pension and retiree benefit plans and restructure debt. Rival carriers later combined, giving them larger route networks that were more attractive to lucrative corporate travel customers (Milford). The bankruptcy decision was caused by the attacks at 9/11 that led people to decrease air travel, financing terms and availability, currency exchange rates, the current inconsistency and volatility of oil prices, and the downturn in economic stability and growth rates.
American Airlines sponsors four defined benefit pension plans covering nearly 130,000 workers and retirees. While these plans are insured by the Pension Benefit Guaranty Corporation, American Airlines is responsible to pay benefits owed under its four pension plans on its own (PBGC.gov). These plans are ongoing and PBGC is doing its absolute best to ensure that American maintains responsibility for the plans and keeps the pension promises it has made to employees. By doing this, people who are counting on those plans can receive their full plan benefits, without regard to the limits in the pension law and PBGC will not be forced to pick up obligations that AMR really can afford. The Pension Benefit Guaranty Corporation is actively involved in the bankruptcy, both directly and as a member of the Committee of Unsecured Creditors (PBGC.gov). On April 20, 2012, in response to news of a possible American Airlines merger with US Airways, PBGC Director Josh Gotbaum said: “We’re continuing to work for a strong airline that offers dependable air service, provides jobs, and preserves its pensions. In order to get the best resolution for everybody, all options should be on the table” (PBGC.gov).
Due to the massive deficit and current economic situation, the PBGC has taken the role as a sort of monitor of the situation. For the PBGC, it is a battle to avoid, or at least minimize the damage from, what promises to be the largest claim in agency history. If they were to take over all four of American Airlines’ plans — for pilots, flight attendants, agents and ground crews — it would give the PBGC $18.5 billion in liabilities but just $8.3 billion in assets, creating a $10.2 billion difference. PBGC benefit limits would cap the claim at $9 billion, leaving roughly $1 billion in benefits unpaid (Bradford). While they are seeking to protect the pension benefits of the American Airlines employees, they are not in a position to pick up all the monetary promises and are instead forcing AMR Corporation to exhaust any alternative to the destruction of pension plans.
Similarly to American Airlines, United Airlines was forced to file chapter 11 bankruptcy following the terrorist attacks of 2001. Two out of the four airplanes hijacked belonged to United Airlines and the repercussions were astronomical. An airline industry downturn resulted, and coupled with economic difficulties, skyrocketing oil prices, and higher labor costs, the company lost $2.14 billion in 2001. After attempts to secure additional capital failed, UAL Corporation filed for Chapter 11 bankruptcy protection in December 2002 and the ESOP was terminated. Since June of 2005 when PBGC assumed responsibility for the United Airlines pension plans, almost 125,000 out of 126,000 participants and retirees have received Benefit Determination Letters. They hoped to issue the remaining letters, but they are currently performing asset valuations and recalculating the asset allocation for the United Airlines’ pension plans, which may cause final benefits to change slightly. The total number of BDs remaining to be issued, which stands at approximately 1300 will be distributed towards the Pilots Fixed Benefit Income Plan (400), Ground Employees ' Retirement Plan (300), Management, and Administrative & Public Contact (MAPC) Pension Plan. It has been said that The PBGC 's handling of defined benefit plans terminated by United Airlines in 2007 and 2008 was “seriously deficient,” according to a new report from the agency 's inspector general (Bradford). The PBGC will correct any errors and pay the overdue amount with interest, according to the statement. As of right now, this scenario is very similar to American Airlines because both bankruptcies stemmed from the same issues that the airline industry has been facing. While the American Airlines case is still very new, it can be seen that this will take years to settle due to the huge amount of liabilities and debt that the PBGC is facing.
This case scenario also occurred with Aloha Airlines in 2005. The Pension Benefit Guaranty Corporation announced it has assumed responsibility for the pensions of nearly 4,000 employees and retirees of Aloha Airlines Inc. in 2006. The PBGC determined that three Aloha Airlines defined benefit plans ended as of December 14, 2005: the Pilots ' Fixed Retirement Plan, the Pension Plan for Non-Represented Employees, and the Pension Plan for Employees Represented by the International Association of Machinists. According to estimates made by the PBGC, the plans are 55% funded with $190 million in assets to cover the $345 million promised in benefit plans. The PBGC was to be responsible for $117 million of the $155 million shortfall. On February 2, 2006, the court approved a settlement between Aloha and the PBGC providing for termination of the three plans. The settlement also provides that a fourth Aloha plan, the Pension Plan for Dispatchers, will remain ongoing under the company 's sponsorship.(PBGC.gov) In this case the PBGC allowed for some termination of plans and provided a massive amount of money to make up for the shortfall. This is a bit different from American Airlines because the PBGC deemed them to be financially incapable of taking on responsibility of their outstanding benefits. Unlike American Airlines, Aloha Airlines was a smaller firm that had already stressed their assets completely. American Airlines will need to pick up a lot more of the responsibility based on their history and assets on hand currently.
In 1990, Continental Airlines filed for protection from its creditors under chapter 11 bankruptcy. They attributed this action to the jump in fuel prices that resulted from the crisis in the Persian Gulf and the cost of interest on its huge debts. The settlement that the Pension Benefit Guaranty Corporation reached with Continental Airlines over claims for the Eastern Air Lines pension liabilities and Continental 's own pension plans was approved on Sept. 16, 1992, by the U.S. Bankruptcy Court for the District of Delaware. Under the settlement, valued at $115 million to $130 million, PBGC received $24 million in cash, a secured note for $75 million backed by beneficial ownership of an airline trust, an unsecured claim of $375 million and $10 million in stock of the reorganized Continental, backed by a cash guarantee, that will go to Continental 's ongoing pension plans (Schneider). Continental also transferred 15 airplanes to the trust, of which PBGC was the beneficiary, and leased the planes to Continental. The note was secured by the airplanes and the leases. The residual value of the planes was also guaranteed by Continental Airlines.
The major difference in the American Airlines case is that there is a lot of suspicion regarding their current assets. As a company that has endured the harshest economic times, the PBGC is being very thorough in how the evaluate AMR’s ability to pay their pension plans. Unlike Aloha Airlines that was a tiny carrier out of Hawaii, American Airlines has holds all over the globe. Despite this, AMR is giving the PBGC a great amount of difficulty in coming to a conclusion on what they can, or what seems to be the case, what they are willing to provide in terms of finances. These cases are greatly similar due to the fact that they are all based around the airline industry and rely on a compromised settlement between the corporation and the PBGC.
Evaluation in the Context of Human Resource Policies
American Airlines recently filed for bankruptcy leaving the airline community in shock. They were the last of the major domestic airlines to file for bankruptcy. There is much doubt amongst the employees and customers in response to this Chapter 11 bankruptcy filing. In previous cases, such as those of United Airlines, Aloha Airlines, and Continental Airlines, they have had to terminate their pension plans as well as have a loss of loyal employees. However, many of these airlines like Delta and United have come back better and stronger than ever. American has four defined pension benefit plans within their employee packages covering over 100,000 employees and retired persons. They are responsible for paying the benefits owed to all employees. The job of the PBCG is to ensure that American Airlines keeps its promises to their employees and pay what is owed to them. The maximum benefit PBGC can pay American employees is $54,000, the maximum allowed by law (PBGC.gov). Unlike the rest of these airlines, American Airlines has been trying to do their best in order to keep their pension plans as well as all of their customers. Throughout this crisis they have made sure to handle all issues thrown at them. The PBGC is making sure that it is their last duty to eliminate any plans that could affect 130,000 employees and retirees (PBGC.com). AMR, the parent company of American Airlines, is trying to cut pension plans because of examples set by other airlines, but AMR needs to prove that cutting the pension plans is the only way they can stay in business, it’s the law. It is not the intent or responsibility of AMR to decide what pensions will be cut. AMR believes that the pensions have to go in order to recuperate “rightful place at the top of the industry” (PBGC.gov). In fact, many companies have successfully restructured themselves without ending their retirement pension plans; some of which were also in the airline industry. Northwest and Continental both emerged from debt still holding onto pension plans. Therefore, it is possible to have American Airlines prosper the same way. AMR has said that unless the pension plans are terminated, American Airlines will have to find $800 million a year to pay for these plans. AMR obtained pension relief from Congress “that allowed the airline to reduce and defer pension payments” (PBGC.gov). This tactic helped American Airlines save more than $2.1 billion over the last half a decade. The money borrowed from these pensions has contributed to funds that helped keep American Airlines in the air. AMR claims that these pension costs are too expensive for them to handle. To the contrary the pensions will only be half of the $800 million in six years. AMR also believes that employees will not feel the wrath of a pension plan cut, but retirees would lose at least $1 billion in retirement plans and some health care benefits if the PBGC doesn’t help this company. American Airlines doesn’t want to scare away their customers just as much as they don’t want their employees to think they are uncared for.
Even before the announcement of American Airlines filing for bankruptcy they made sure to interact with their customers before they even got a chance to experience the harms incurred by the crisis. Some steps American Airlines took to ensure top customer satisfactions throughout this harsh time were taken on and offline. American Airlines first emailed all their loyal American Advantage Rewards members explaining their decision on filing for bankruptcy. These emails were sent before anything was in the news, on twitter, or on Facebook. Another step this airline took was putting a top banner on their American Airlines Homepage promising customers that business was as usual and flights would not be interrupted. This also meant that reward miles could still be used or managed. In minutes, customers could also be connected with an operator on the customer service line. Customers who spoke to these operators were insured that their miles were safe and they genuinely thanked each caller for being a loyal customer. (Ester Rae
Marketing). Online, American Airlines posted a video via Facebook showing that this decision can and will be a positive change in the future. Customers “liked”, “shared”, and “commented” on this video showing support for the company. On the American Airlines twitter page, the airline responds to all loyal customers and makes sure they are satisfied with this means of transportation (Ester Rae Marketing). American Airlines wants to ensure that each customer knows that they remain deeply committed to delivering outstanding service and meeting travel needs with the same standards of safety, security, and reliability customers have come to expect. Travel packages are still available for those customers that qualify. American Airlines is putting all efforts into making sure that there are no immediate changes to service, schedules, or flights. All tickets will be honored and all reservations will be fully intact. In addition, policies regarding exchanges and refunds will remain the same. American Airlines remains committed to providing a superior customer experience with a focus on delivering what their customers value most. The American Airlines team is dedicated to working as quickly and efficiently as possible to restructure their company so they can emerge from chapter 11 stronger and more competitive than ever.
Recommendations Bankruptcy is a way of life for airline industries and it is now American Airlines’ turn to cope with these challenges. It seems as though American Airlines must change the entire infrastructure of the company that would allow them to be profitable in the future. Without the proper change the entire company would continue to suffer and they will be seen as extremely weak compared to their counterparts. American Airlines has the ability to recover just like Delta and United were able to do, but only if they follow specific managerial decisions in order to be successful. It is very important for American Airlines to implement strong managerial practices in order to bounce back from this bankruptcy filing.
American Airlines was the last major domestic airline to file for bankruptcy, but this decision will allow them to reduce their costs, re-write the contracts with their pilots and flight attendants, and find ways to reduce their debts. American Airlines is said to be at a disadvantage because their costs are so high compared to their rivals. As with most bankruptcy in the airline sector, most airlines still operate with relative ease. American airlines will need to recognize the problem, return to profitability, settle their debts and eventually be released from bankruptcy. However, in order to get out of this situation, they must take the necessary steps to return to a top-tier airline.
American Airlines shouldn’t do anything drastic such as raising their fare or cutting out certain routes all over the globe. The airline must figure out ways to hang on to repeat travelers as well as valuable employees. A potential way of doing this was previously mentioned by Joshua Sanborn’s article, in that they should implement additional bonus programs, and try and lure passengers away from competitors, while maintaining their own.
Since American Airlines sponsors four defined pension benefit plans to workers and retirees, the company must stay responsible and pay off these benefits owed. The Pension Benefit Guaranty Corporation is doing everything they can to force American Airlines to maintain the responsibility of keeping their promise to employees. Employees expect full plan benefits, without regard to limits of the pension law, and American Airlines should be obligated to pay these plans off without hurting the reputation they have with their customers.
American Airlines is said to continue to fly scheduled flights while honoring tickets and reservations. In order to sustain customers, they must continue to operate as if nothing had happened. Even though filing for chapter 11 bankruptcies is the last legal step before liquidation, this does mean that American Airlines cannot fight through and be profitable.
In 2005, Delta Air Lines plunged into bankruptcy. Delta today can be seen as the model airline that took on bankruptcy and came out “the picture of health” (Foust). Thanks to management overhaul, cost cutting, more profitable routes, and a merger they were able to prevail as what many see as the top air carrier today. This transformation took five years, but it came out with “the best balance sheets, the best route structure, and the best prospects of future profitability” (Foust). In order for Delta to get back on track, they had a willingness to part with management and employees. Trying to convince pilots to take pay cuts was a huge sacrifice that paid dividends in the long run of the company. The new CEO of Delta later donated his bonus to a scholarship fund for employees. Some of these solutions should be recommended for American Airlines.
American Airlines lost almost all of its monetary assets in the last two quarters as well as losing a substantial amount of money over the last few years. They are in such debt that change must happen and it must happen instantly. A complete overhaul might not be necessary; however, a willingness for management and employees alike to make sacrifices in their pay in order to remain in the game is necessary. By asking pilots, top-level managers, and employees to take pay cuts it will help the company stay afloat until they start paying off debts, pension plans, and begin making a profit again. Managers like Gerald Grinstein of Delta Air Lines made the right choice when he received his bonus. He instantly gave that money to a scholarship fund for his employees’ children. Actions like that go a long way and should be mirrored by American Airlines because if you make your employees happy, they will be more apt to stay on board even through a tough time like a bankruptcy.
In the short term, American Airlines might have fewer flights, fewer routes, and fewer employees for the company and potentially a smaller American Airlines. Depending on how they emerge from this bankruptcy, they could come out as a stronger competitor just like their rivals, Delta and United did. Growth plans in the future might include more planes in order to build the airline into an even bigger and more efficient American Airlines than ever before.
American Airlines must make sure that their corporate culture stays relaxed at a stressful time. It is very difficult to come up with a conclusion on how to deal with certain situations like the pension plan cases. However, American Airlines remains deeply committed to provide a safe and secure airline for years to come. It is important for American Airlines to make specific managerial decisions and practices in the best interest of the entire company in order to be profitable and successful in the future.
Conclusion Overall, it is important to consider all of the relevant factors that contributed to the bankruptcy of American Airlines. Without analyzing all of the relevant factors, it would be impossible to conclude exactly why the bankruptcy occurred. Overall, the frequency of other airlines declaring bankruptcy contributed to the demise of American Airlines. Other airlines were able to recover from their bankruptcy, and this contributed to their success in the end. With any sort of radical change within a company, it is important to consider how changes affect employees. In order to be sure that employees are appropriately taken care of, the current human resource policies must be considered when a major decision regarding a company is made. In the case of American Airlines, the bankruptcy has the ability to affect their four defined pension plans. These pensions plans must be considered when the financial situation of the company is assessed. Overall, the bankruptcy of American Airlines will affect the company as a whole. By changing the current policies related to the company, American Airlines has the ability to recover from the current financial state. Without changing the current policies, there is no way for American Airlines to recover. Eventually, the proper changes will allow the employees to flourish within the company and will allow American Airlines to grow.
References
PBGC Assumes Pensions of Aloha Airlines. (2006, April 28). Retrieved from Pension Benefit Guaranty Corporation: A U.S. Government Agency: http://www.pbgc.gov/news/press/releases/pr06-46.html
Pension Benefit Guaranty Corporation: A U.S. Government Agency. (2011, August 31). Retrieved from United Airlines Benefit Determination Status: http://www.pbgc.gov/wr/bulletin/info/bulletin149.html
American Airlines Post Bankruptcy Response: Thumbs Up. (n.d.). Retrieved from Ester Mae Marketing: http://estermaemarketing.com/featured/american-airlines-post-bankruptcy/
American Airlines (AMR) Pensions. (2012, April 20). Retrieved from Pension Benefits Guaranty Corporation: A U.S. Government Agency: http://www.pbgc.gov/wr/other/pg/american-airlines-amr-pensions.html
American Airlines Post Bankruptcy Response: Thumbs Up. Ester Rae Marketing, n.d. Web. 9 May 2012.
Airline Bankruptcies in the United States. (n.d.). Retrieved from Wikipedia: http://en.wikipedia.org/wiki/Airline_bankruptcies_in_the_United_States
Bradford, H. (2011, December 1). PBGC plan valuation problems go beyond United Airlines. Retrieved from Pensions and Investments: http://www.pionline.com/article/20111201/DAILYREG/111209987
Bradford, H. (2011, November 30). Report: PBGC mishandled plan asset values for United Airlines. Retrieved from Pensions and Investments: http://www.pionline.com/article/20111130/REG/111139978
Bradford, H. (2012, February 6). PBGC worthy opponent in AMR bankruptcy fight. Retrieved from Pensions and Investments: http://www.pionline.com/article/20120206/PRINTSUB/302069984
Foust, D. (n.d.). How Delta Climbed Out of Bankruptcy . Businessweek - Business News. Retrieved May 9, 2012, from http://www.businessweek.com/magazine/content/09_21/b4132036798289.htm
Schneider, P. J., & Pinheiro, B. M. (2008). ERISA: A Comprehensive Guide. Austin: Wolters Kluwer Law & Business/Aspen Publishers.