On November 29, 2011, American Airlines became the last of the legacy airlines to go bankrupt when its parent company, AMR Corporation, filed for Chapter 11 reorganization. Sought almost exclusively by large corporations, a Chapter 11 bankruptcy allows a firm to continue operating while reorganizing itself to create a more profitable financial framework (“Chapter 11 Definition”). Essentially, this provides a last resort business strategy: if the firm successfully reorganizes, its new financial structure begins cutting its debt. If the reorganization fails, the company begins liquidating its assets to repay the stakeholders to whom it owes money (“An Overview of Corporate”). An evaluation of the AMR bankruptcy along with the bankruptcies of its competitors provides insight to its potential impact on airline passengers, airline employees, and the economy as a whole.
To put the AMR bankruptcy into perspective, it is necessary to examine market conditions for airline companies since 2000. Every major American airline with the exception of American Airlines filed for Chapter 11 bankruptcy between 2002 and 2005 as a result of labor costs increasing while demand decreased following the recession and the September 11 terrorist attacks (Rushe). Between an already struggling economy, heightened airport security, and the reluctance of many passengers to continue air travel, these airlines filed for bankruptcy to escape debt and return to annual profitability. As of 2011, every major airline had achieved this goal with the exception of American Airlines, the only of these companies to forgo bankruptcy and, consequently, the only to remain in debt. As American Airlines’ financial issues became exacerbated by high oil prices, AMR finally filed for Chapter 11 bankruptcy in 2011 (McCartney).
In the short term, the AMR bankruptcy is unlikely to affect passengers in any significant manner. By filing for a Chapter 11 reorganization, AMR ensured that business operations will continue, meaning previously scheduled fights will still fly, all tickets will still be honored, and frequent flier miles will remain valid (McCartney). Furthermore, because airlines primarily compete based on fares and because American Airlines will need to try even harder to prevent customers from choosing other airlines during its bankruptcy, fares should remain similar if not lower while the company restructures. Thus, short term customer experience with American Airlines should remain unchanged.
In the long term, the bankruptcy could impact passengers more significantly as American Airlines reduces the number of flights offered. To emerge from the bankruptcy successfully, the carrier will need to reduce the increasing labor costs that caused it to fall into debt. As one method of reducing labor costs, AMR will layoff a significant fraction of their workforce. With fewer pilots, flight attendants, mechanics, and runway workers, American Airlines will naturally need to reduce the...