The NY Times explains:
Most airlines found a way back to profitability in the last few years by shedding costs through bankruptcy, reducing capacity and merging with one another. But American lost passengers to newly merged carriers like Delta Air Lines and United Airlines as well as low-cost competitors like Southwest Airlines. It retrenched around fewer hub airports. It struggled with older, jet fuel-guzzling planes and delayed renewing its fleet.
So American’s decision to file for bankruptcy this week highlighted both the industry’s remarkable transformation over the last decade and the distance now separating this airline from its peers. While other airlines have found ways to remain profitable even with elevated fuel prices and slowing passenger demand, American has been losing about $100 million each month. American was once the nation’s leading domestic and international carrier; now it is a distant third.
“American’s problems didn’t happen overnight but they have finally caught up with them,” said Robert Herbst, an independent analyst and retired airline pilot. “Their higher costs have forced them to cut unprofitable routes, which worsened their revenue problem. Bankruptcy was inevitable.”
The industry’s road to financial stability has been rocky and remains fragile. Employees, whose pensions and salaries were cut back, paid a heavy price. Dozens of airlines disappeared over the last decade, some through bankruptcies and others through mergers. The industry’s losses reached $60 billion in that period.
Thanks to reduced competition, the surviving airlines were able to raise ticket prices and increase revenue in all sorts of ways through a variety of fees for things like checked bags and booking an aisle seat.
American was the last of the so-called legacy carriers, created before the industry was deregulated in 1978, not to have filed for bankruptcy. If it manages to reduce its costs under court protection, analysts say it could become a candidate for a merger or a takeover. The most likely partner is US Airways, whose chief executive, Doug Parker, has long advocated the need for consolidation in the industry.
Whats this mean for pensions?
“A company’s Chapter 11 reorganization does not necessarily mean that a company’s pension plan will be taken over or terminated, although that is a possible outcome,” American Airlines spokesman Sean Collins said.
However, he added that one of the purposes of the bankruptcy is to enable the company to reduce its costs and that the company’s pension obligations make it harder for the airline to compete.
“American’s pension plans are very expensive — the company spends more on them than our competitors spend on their retirement plans,” he said. “Given American’s plans to reduce its costs to a more reasonable level in line with industry norms, these costs and many other factors are considerations when deciding whether to continue the pension plans.”
As American Airlines weighs dropping its pension plan, PBGC will be pushing them to keep it. In recent years, the agency has helped persuade Delta and auto-parts maker Visteon to hold on to pension plans they might otherwise have dropped during reorganizations, Gotbaum said.
“When a company says we can’t afford the pension plan, we say we need to see the numbers,” he said. “They have to prove it.”
The growing financial pressures on the PBGC have stirred the debate over how to raise funds for the agency. Proposals to raise the fees, or premiums, that the PBGC charges companies, have been languishing in Congress, in part because of business opposition to a price hike. Gotbaum has previously warned that without more such revenue, taxpayers may be forced to bail out the fund.
The pension plans offered by American Airlines, which cover almost 130,000 people, are obligated to pay $18.5 billion in benefits, according to the PBGC. But the company only has assets of $8.3 billion.
And your frequent flier miles?…
The American Airlines bankruptcy may create one more barrier to getting the tickets you want when you want them. Now that the airline is in bankruptcy, it is likely to cut back on schedules and the number of seats on various flights, to save money. That will make even fewer seats available for purchase – either with dollars or with points.
How about this workaround: Use your miles to book a trip on one of the airline’s partners? Not so fast. With fewer seats available, the bankrupt airline will have fewer seats to offer partners on a reciprocal basis. That partner, in turn, will make fewer seats available to customers of the bankrupt airline. So as a result of the bankruptcy, the overall pool of seats is likely to shrink.
Several years ago, the airlines came up with a very creative way to have frequent flyers redeem more miles for “free” seats. They offered some seats with no restrictions called “Anytime” seats. But to get one of those seats, you had to pay twice as many miles as you did for a regular seat – called a “PlanAhead” seat. In the post-bankruptcy era, one might expect to see the number of bargain PlanAhead seats decrease dramatically.
