Bloomberg reports that US Airways (NYSE: LCC) has approached unsecured creditors of American Airlines parent AMR about buying the airline as its leaves bankruptcy. AMR management says it plans for the carrier to stay independent. That is a bad idea. The current economic environment and fuel prices would challenge the ability of a “new” American to be viable.

AMR will have a number of financial advantages in Chapter 11. Some of its plane leases could be voided. It likely will be able to alter employee contracts. It will dismiss thousands of workers and may be able to change their pensions. Planes will be taken out of service so that capacity within the carrier’s system can be adjusted to allow for more profitability.

All of these advantages may be too little for American to stay financially viable once its bankruptcy ends. The International Air Transport Association recently reported that airline profits globally are headed toward zero this year. Further, the organization believes that industry profits could disappear completely in 2012 if fuel costs get much higher and remain at those levels. The head of Emirates, one of the largest and best-funded carriers, expects that some airlines will be unable to weather the harshness the industry faces for the balance of the year.

The bankruptcy court has a number of options in the AMR case. One is to force American into the kind of consolidation that Northwest set with Delta (NYSE: DAL) and that United (NYSE: UAL) set with Continental two years ago. Each was partially the result of high fuel prices in 2008. Another reason was the falling global economy. Those circumstances may exist now, or will in the near future.

Even with the advantages of Chapter 11. American probably cannot survive on its own.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.