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AMR Bankruptcy would save the company $800M

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AMR Bankruptcy would save the company $800M

Old 09-21-2011, 12:48 PM
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Default AMR Bankruptcy would save the company $800M

AMR Could Play Bankruptcy Card To Break Labor Logjam - Forbes

Trying for $800 million in savings

At the Deutsche Bank Aviation and Transportation Conference held recently, American Airlines denied seeking bankruptcy liquidation (Chapter 7) but did not rule out the possibility of seeking bankruptcy protection (Chapter 11) to reorganize its labor agreements that put it at a marked disadvantage to airline industry peers such as Delta Air Lines, Southwest Airlines,US Airways and United Continental.

In the past, several major players including Delta, US Airways and United Airlines have filed for bankruptcy in an attempt to rationalize their costs. American Airlines has avoiding bankruptcy so far, but this looks increasingly likely as negotiations have broken down between the unions and management.

Below, we take a look at what might factors may cause American to file for bankruptcy protection and how these may impact the company’s valuation.

We have a $5.65 price estimate for American Airlines, implying a premium of around 60% over the current market price.

American Airlines’ work force is said to rank among the lowest in the industry in terms of productivity and according to management estimates, the airline is at $800 million-a-year disadvantage to competitors on labor costs (See AMR Faces Union Stalemate in Bid for $800 Million Labor Savings).

While competitors have negotiated better deals with the unions through bankruptcy, American continues to honor its expensive labor agreements. The airline has been trying to negotiate new agreements with its union for years now, but the contract negotiations have stalled badly. While labor costs account for about 31% of all operating costs at American, they stand at around 22-23% for Delta and United Continental.

However, the airline is trying to make up for the higher labor costs through efforts like fleet replacement aimed at deriving fuel efficiencies and the recent spin-off of its regional carrier, American Eagle to access more competitive rates from other carriers. The airline has also entered into new partnerships with British Airways and Japan Airlines that should boost revenue from international travel.

If American files for bankruptcy and comes out with re-negotiated labor contracts, it should be able to reduce its operating expenses by eliminating the $800 million cost disadvantage relative to peers, at least in part. This indicates a potential upside to the current valuation which factors in heavy compensation and retirement liabilities.
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Old 09-21-2011, 01:00 PM
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They can try that, but I do not think APA would play ball.
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Old 09-21-2011, 01:05 PM
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I heard today that several banks were getting credit down grades and more could come as Moody's and friends say that it is no longer the case, given the financial situation of the government, that banks are too big to fail. They can fail.

Wonder if this will apply to airlines? Could AMR be that much more too late to the chapter 11 table?
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Old 09-21-2011, 01:22 PM
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FtB:

I suspect that may be the case. The laws changed the month after DAL filed. They got under the wire. AMR will not be as lucky as we were.

My crazy guess is, if they go CH11 they will be forced to fragment. I know what we want, and it would be in NYC, DFW and MIA.
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Old 09-21-2011, 02:06 PM
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FTB,

The bankruptcy rules have changed.

To know what is going to happen at American, watch the management staffing. Delta hired bankruptcy experts fives years (and some NINE years) before the actual filing. A lot of financial engineering went on between 2000 and 2005 to protect those who's paychecks and retirements the Board was willing to protect.

Since the value of the common stock will go to zero, the "club" of those enriched off of bankruptcy is exclusive and they follow a pattern. You could see the Delta and NWA bankruptcies follow a nearly identical pattern as United did.

Lots of McKensie consultants hanging around is a sure sign, even on other Continents:
Originally Posted by Last Year
NEW DELHI: Air India may be flying low these days, but the national carrier has a raft of consultants on a high as the airline management seeks expensive suggestions, which it often finds hard to implement.

This Friday, the national carrier's board will consider a proposal to appoint McKinsey & Co as advisor to suggest ways to recover. An airline official, requesting anonymity, said the consultancy was demanding Rs 14 crore as fee for its services, mostly aimed at improving operations and joining the global air synergy, the Star Alliance.
Originally Posted by Last Night
Civil Aviation Minister Vayalar Ravi is fighting the battle of his life to save national carrier Air India from bankruptcy. But it's not an easy job.
In an exclusive interview to Headlines Today, Ravi says he has to beg the Finance Ministry every month to pay salaries of Air India employees.
"Every month end I go to Pranab Mukerjee's house at 12 o'clock in the night and so he asks me 'why have you come?' To which, I say I need Rs 200 crore. Arre Rs 200 crore in the night? Which means, I have to get the money from him for the salaries also. I need to be in a position, where I can depend on myself. That is my first step," Ravi told Headlines Today on Tuesday.
This is sorry tale of a man with perhaps the toughest job in government right now: turning around the troubled national carrier.
The minister claims he has already started working towards it.
"The various directors for important posts are missing. Prime Minister Manmohan Singh has told me to appoint members from the open market and most of them have been filled now: HR, finance, marketing and commercial and also certain propositions. So, the team has come. Now, we are looking at the process, by which we can help save the posts, save the money and the areas from where we can get more cash flow," says Ravi.
But the biggest problem at hand continues to be the delay in the payment of salaries of the AI employees.
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Old 09-21-2011, 02:21 PM
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Originally Posted by acl65pilot View Post
My crazy guess is, if they go CH11 they will be forced to fragment. I know what we want, and it would be in NYC, DFW and MIA.
My (far less crazy) guess is that there will be no fragmentation and you'll have to find another target of opportunity.

Your bloodthirstiness is obvious.
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Old 09-21-2011, 02:40 PM
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Originally Posted by eaglefly View Post
My (far less crazy) guess is that there will be no fragmentation and you'll have to find another target of opportunity.

Your bloodthirstiness is obvious.
Trust me, I prefer to have AMR in the drivers seat on that necessary merger over LCC or B6.
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Old 09-21-2011, 03:04 PM
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I hope that little announcement/comment is for posturing in negotiations. One thing about a bankruptcy is that management is along for the ride just like labor. The BK judge and creditor committee call the shots - not management. For that reason alone a strategic bankruptcy is very risky and may not yield the desired effect. Most management teams do everything to stay out of Chapter 11 simply because they lose control over the company.
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Old 09-21-2011, 04:35 PM
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Originally Posted by HSLD View Post
I hope that little announcement/comment is for posturing in negotiations. One thing about a bankruptcy is that management is along for the ride just like labor. The BK judge and creditor committee call the shots - not management. For that reason alone a strategic bankruptcy is very risky and may not yield the desired effect. Most management teams do everything to stay out of Chapter 11 simply because they lose control over the company.
It takes some big brass ones to intentionally foray into Ch.11 if it's not an absolute last resort, but with excellent planning and a top-notch (and totally unscrupulous) team it cam pay off big time for the few key players.

I admit I've lost my SA on how that would work since the new rules came about. Maybe it wouldn't be worth the risk anymore.
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Old 09-21-2011, 04:56 PM
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How has Chapter 11 changed regarding labor agreements?

GF
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