Upon reading the Wall Street Journal’s article on American Airlines’ (AMR) net loss that they posted earlier today, I started to ponder what Chairman and CEO Gerard Arpey said about the company’s labor agreements. We all know that AMR struggles when it comes to negotiating competitive pay (yet reasonable pay) with their unions as do all other major airlines, but he stated that the cost of the agreements is $800 million a year which was as a result of avoiding bankruptcy in 2005.
I’ve thought about this in the past so when I first read him quoting this predicament, it didn’t surprise me. When any industry is doing poorly and company books start to turn red, it’s unfortunate to see them go bankrupt—Delta (DAL), Northwest, Continental, United (UAL), and others. But bankruptcy wasn’t a bad thing for any of them.
In any other industry, if one company goes bankrupt, its good for their competitors. But in the airline industry, that statement is completely false and the opposite is true. When one airline goes bankrupt, the government permits the to negotiate its debt with its creditors if they merge with another airline. And this is exactly what DAL and UAL did with Northwest and Continental, respectively.
For AMR on the other hand, this was not the case. Truth is, the fact that AMR didn’t go bankrupt severely effected the airline’s long-term growth and is definitely something that Arpey and his team are feeling the wrath of today.
Luckily, however, I do feel that the company might be able to revive itself. I’m not going to jump ahead and say that they’re going to come out on top, but I think they have it in them to turn their books solid black again year-after-year later this decade. I know that many of my colleagues say I’m looking way too far into the future, but AMR has is made up of good fundamentals. Good fundamentals can and should improve the airline as a whole, and if they don’t, then someone will find AMR and buy them. (Maybe the International Airways Group, owner of British Airways and Iberia?)
DISCLAIMER: I am long AMR.