AMR Finally Grows Up

AMR filed for Chapter 11 more than seven months ago. Management had harbored hope that the company and its American Airlines operations could emerge as independent operations. AMR has decided to admit that the plan was nothing more than a dream. The charade is finally over.

Thomas Horton, AMR’s CEO, recently said, “It now makes sense to carefully evaluate a range of strategic options, including potential mergers.” He likely will lose his job in a marriage. But no amount of strong management can overcome the obstacles of high fuel prices, increasing competition from mega-carriers Delta (NYSE: DAL) and United (NYSE: UAL), and carriers based overseas — many of which themselves have been created by mergers to increase efficiency.

American quickly has become too small, even though it was the largest carrier in the United States, based on passenger miles, only a few years ago. AMR then understood bigger was better, when its “hub and spoke” system dominated the industry and gave it the advantages of scale. AMR forgot that as it planned to emerge from Chapter 11 as an independent operation.

The strongest wall that AMR faces is the power of the unions, of which most of its workers are members. These unions have resisted airline efforts to cut employees through Chapter 11 for years. For once, they found an ally — US Airways (NYSE: LCC) — which has promised to keep many of AMR’s employees in exchange for their support for a merger.

Yet another hurdle for AMR is the effort by carriers in Asia and Europe to gain market share in routes across the Atlantic and Pacific. Ironically, Japan Air used bankruptcy to strengthen its competitive position. British Air and Iberia merged last year to create a massive carrier. Transcontinental routes are so profitable that carriers will bleed one another for market share.

Finally, despite the drop in oil prices, jet fuel costs have not fallen enough to help make airlines easily profitable. AMR has no solution to a problem over which it has no control.

American Airlines was never going to be independent. AMR management finally has the sense to admit it.

Douglas A. McIntyre