Admittedly, yesterday was a rough one for American Airlines’ parent company AMR, as its shares fell 33% on fears that the carrier is soon heading toward bankruptcy.
Those fears, though, are way overstated. Yes, American is not in the same financial shape as its competitors. It’s sitting on about $4 billion in cash while United/Continental has about $8 billion. While that’s a significant difference, it’s still a pretty good cushion – AA is burning through about $1 billion a quarter. That gives it some time to work something out with its unions, which the airline blames for a large piece of its current financial mess.
AA says its labor costs are about $800 million higher than the competition because nearly all of its competitors have gone through bankruptcy proceedings to re-structure their labor costs. AA has not. It seems somewhat sad and perhaps ironic that AA managed to stave off bankruptcy during two periods when every other network airline succumbed to it, only to find that those same carriers emerged in such better shape that AA was forced into bankruptcy.
AA has also staked much of its hopes on its alliance with JAL, Iberia and BA. That’s fine, but it’s not going to be enough to ride this out. Their ability to turn around their business rests on renegotiating labor agreements. If they can, they’ve got a shot – personally, I don’t believe that adding wi-fi and in-flight TV is the key to turning around the business. Continuing to manage capacity – and the alliance will help with that – while lowering labor costs and growing their transcon presence (in light of some heavy duty competition from Delta) will be the keys to success.
For passengers, though, feel free to book tickets. The airline isn’t going anywhere.