Aircraft leases in crosshairs as AMR Corp. restructures

DALLAS ―  AMR Corp., the bankrupt parent of American Airlines, is racing to renegotiate aircraft leases and bag what experts believe could be hundreds of millions of dollars in savings.

The airline effectively has until Jan. 27 to inform a court about its lease plans, thanks to a bankruptcy statute giving a company 60 days to make decisions on such deals. American, which declined to comment about its lease plans, will need to have a working plan for which leases it wants to keep, alter or reject.

The process is fraught with questions about AMR’s future fleet needs. And lease holders, eager to preserve contracts signed in better days, are sure to balk when faced with the prospects of accepting lower lease rates or AMR’s rejection of outdated and unwanted airplanes.

“There’s a lot of negotiation, and some of it is playing chicken,” said Adam Pilarski, senior vice president at AVITAS, an airline consulting company that also works with aircraft lessors and lenders.

Aircraft leases are likely to be the biggest trimmable cost after labor for AMR, which filed for Chapter 11 on Nov. 29 in New York, citing uncompetitive labor costs as a key disadvantage in an industry that wrestles with overcapacity and high fuel costs. American is the third largest U.S. carrier.

Aircraft and equipment leases amount to around a third of AMR’s roughly $30 billion in liabilities.

Airlines often order aircraft from a manufacturer but lease the planes from a third party as a way to spread the risk of owning costly aircraft.

Bankrupt companies can reject leases on aircraft and engines or renegotiate leases with lower rates. AMR stands to save hundreds of millions of dollars by renegotiating leases, several experts said, citing comparisons with what other airlines did with leases in Chapter 11.

The company must renegotiate with lease holders while keeping enough planes — and the right models — in the air. AMR will need to consider factors ranging from the age of its jets to long-term plans for its fleet. That means lease holders with more fuel-efficient planes may hold more leverage.

“You look at age of aircraft, fuel consumption costs, how many miles are on each aircraft, and what your plans are for upgrading your fleet,” said bankruptcy attorney Kris Hansen, who is not involved in the case but worked on Delta Air Lines Inc’s. bankruptcy.

“Each airline has a full team who does a thorough profitability analysis,” Hansen said.

AMR bankruptcy could spur more airline consolidation

FORT WORTH ― For US Airways , the merger-hungry fifth-largest U.S. airline, a bankrupt American Airlines may present an irresistible takeover target, but many in the aviation world think the headaches and hassles of consolidation are not worth the payoff of such a tie-up.xxAmerican, a unit of AMR Corp., filed for Chapter 11 bankruptcy protection on Tuesday in a bid to shed some of its uncompetitive costs and restructure its debt.

Bankruptcy leaves the company vulnerable to potential takeover attempts from would-be suitors like US Airways, whose chief executive Doug Parker has long promoted consolidation as a means to slim down an industry plagued by overcapacity. US Airways once tried and failed to buy Delta Air Lines as it restructured in bankruptcy.xxSince the Delta/Northwest and United/Continental mergers, American and US Airways have been considered logical partners for a potential combination, but analysts have said American’s high labor costs and unresolved contracts with its unions make any deal too difficult to negotiate.xxSweeping cost cuts in bankruptcy could remove one potential hurdle, but analysts and bankers noted that US Airways still has its own challenges of having to integrate labor groups following its 2005 merger with America West Airlines.

“Strategically that’s one of the final combinations that could make sense, but there’s a real issue for US Airways to do a deal, as well as the fact that US Airways is still slightly smaller,” said one industry banker who asked not to be named because he was not authorized to speak with the media.

A second industry banker added: “US Airways still has two airlines. If they can’t combine those two houses, how they can combine with American? Today there is no labor deal at US Airways, and those labor deals still need to be negotiated.”

Analysts also said the benefits of any merger are less clear for American Airlines.

“From the standpoint of US Airways, it would be a huge opportunity,” said airline industry consultant Robert Mann. “It would take them into markets they don’t have access to today from a hub standpoint.

“Looking at it from the American Airlines’ perspective, it doesn’t make the combined American and US Airways network competitive with Delta or United (Airlines),” he said.

xFor a merger to appeal to American Airlines, Mann said, it would have to bolster American’s international routes. American Airlines is a global airline that hopes to lure business travelers with international partnerships and a hub-and-spoke model that focuses on cities that are major business centers.

US Airways has a strong presence on the U.S. East Coast but has less to offer in foreign markets.

Airlines in bankruptcy are logical targets for a rival willing to attempt a takeover, because the would-be acquirer can present a proposal to a committee of airline creditors rather than directly to the management team, which might be less inclined to take the deal.

Bankrupt airlines also are attractive takeover targets because they have court protection to cut costs and restructure debt.

Neither American nor US Airways would comment on merger prospects on Thursday.

Boeing sees AMR bankruptcy as positive long-term

SEATTLE ― American Airlines’ bankruptcy restructuring should make the carrier more profitable and able to purchase more aircraft, the head of Boeing Co’s. commercial airplane division said on Wednesday.

Speaking at a Credit Suisse aerospace and defense conference in New York, Jim Albaugh said the bankruptcy filing by the AMR Corp. unit would give the carrier long-term stability. But in the short term, American may ask to restructure some aircraft leases, he said.

“Taking a long-term view, the American bankruptcy is a very positive thing for them and a very positive thing for us,” Albaugh said. “By going through a restructuring, they’re going to come out of it a very competitive airline.”

American is the third-largest U.S. airline. The company. which suffers from higher labor costs than its peers, filed for Chapter 11 on Tuesday.

This year the carrier placed a giant split order for 460 single-aisle jets worth up to $40 billion with Boeing and its European rival Airbus EADS.

Bankruptcy could jeopardize parts of the order that are not yet firm. On Tuesday, AMR CEO Tom Horton called the order “rock solid.”

American Airlines, parent company AMR file for bankruptcy

FORT WORTH, Texas ― American Airlines and its parent company AMR Corp. filed for bankruptcy protection on Tuesday after failing to win a deal with pilots earlier this month to pare its labor costs.

AMR had been the only major U.S. carrier to avoid bankruptcy proceedings in the past decade, a move its rivals had used to restructure their labor agreements and cut costs.

That left AMR, the third-largest U.S. airline behind United Continental Holdings Inc and Delta Air Lines Inc, with the highest costs in the industry, and the only major airline that still must fund worker pensions.

The airline said last month it was also suffering from soaring fuel prices that sent its costs 40 percent higher in the third quarter from a year earlier.

AMR also on Tuesday named Thomas Horton as its chairman and chief executive, replacing Gerard Arpey, who retired, the company said in a separate statement.

Under its Chapter 11 filing in a New York court, the company listed assets of about $24.72 billion, while it has liabilities of $29.55 billion. The company said it has $4.1 billion in cash.

AMR said both American Airlines and American Eagle are expected to fly normal schedules throughout the Chapter 11 process.

“We plan to initiate further negotiations with all of our unions to reduce our labor costs to competitive levels,” CEO Horton said.

AMR’s top rivals, UAL Corp and Delta Air Lines, which both used bankruptcy protection to slash costs, have since found merger partners — Delta bought Northwest Airlines and UAL Corp bought Continental Airlines to form United Continental Holdings.

AMR has been in labor talks with its pilots for five years, and a wave of pilot retirements in October had prompted speculation the airline was nearing a bankruptcy filing.

Some industry watchers believed the pilots chose to retire to lock in pension values that may now be in jeopardy as the company moves through bankruptcy court.

The company said the bankruptcy has no direct legal impact on operations outside the United States and it was not considering debtor-in-possession financing.