How Will AMR Use The Power Of Bankruptcy?

| About: American Airlines (AAL)

A lot of people are getting hurt by AMR's (AMR) (the parent of American Airlines) pre-packaged bankruptcy. Shareholders are being wiped out. Creditors may have to take a haircut. The workers are going to have their rights - both pension and bargaining - taken away from them, as well as much of their wages.

But in the end, the effect is likely to be salutary.

The airline that comes out of this will have wages below the industry average. It will have a younger fleet, it will be more competitive. That's the power of bankruptcy. It lets you do things you couldn't do otherwise. That's why “too big to fail” is such a horror, because without the discipline bankruptcy provides real business reform is impossible.

Which brings me to what AMR should actually be doing in bankruptcy. Change the route structure. Become more like Southwest.

I got a lesson in this while coming back from California after a business trip. Three different Southwest flights left from a gate I was watching in the three hours it took my own plane to load up for a Delta flight east. (Southwest comes to Atlanta in February – yippee!)

The less time a plane spends on the ground, the more time it spends in the air, and determines the amount of money it can make. Airport time should be like a NASCAR pit stop, which is how Southwest's route structure makes things. This is a bus, not some romance. Change that, in some other large carrier, and you create real market competition.

So far, none of the other big carriers that used bankruptcy as a way out of their debts have taken this lesson. AMR represents the last chance to get it right.

AMR, which is based in Dallas, has seen this close-up. Southwest began as an in-state carrier, becoming interstate only after deregulation. You're going to read a lot over the next few months about “greedy unions” and “labor flexibility,” but what's really at issue is the route structure, how you keep planes in the air for more time and on the ground for less.

If AMR can use this bankruptcy to solve that problem I'll be a buyer. If it just uses this as an excuse to kick workers to the curb, cut bills to its creditors, and goes on with business as usual it will be back in bankruptcy court, this time the way Eastern Airlines was in it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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