When an iconic company files for Chapter 11 bankruptcy protection, it is often viewed as a bad sign for the industry in which that company is a signature brand. That was certainly the case in the prior decade when United Airlines, Delta Air Lines, Northwest Airlines and US Airways all operated for stretches under the supervision of a bankruptcy court. The US legacy airline business was sick and the Chapter 11 filings were signs that things were bad and could get worse.
But, in one of the many ways the American Airlines' (AA) bankruptcy is unusual, the filing is generally viewed as a positive for the US airline industry, which is expected to earn a healthy profit for the second straight year in 2011 even in a slow-growth economy.
For one, AA will likely get smaller, meaning more capacity will be taken out of the US market. And US airline CEOs and Wall Street analysts alike believe there are still too many seats chasing too few passengers in the mature US market—85% average load factors notwithstanding.
Secondly, as JP Morgan's Jamie Baker pointed out in a research note, the increasingly consolidated US airline business appears to be becoming more about carving out a comfortable profit zone than direct, heated competition. United, Delta and US Airways (AA's three legacy rivals) all went through Chapter 11 and "today those airlines are producing returns nobody ever dreamed possible, against a backdrop of 9% unemployment and [greater than] $100 oil," Baker wrote. "There's no evidence that those three are 'going after one another.' A more viable [AA] doesn't pose a threat; it contributes to a more viable industry."
Finally, as was discussed in a previous post, AA views the Chapter 11 process as a way to get its cost base more in line with competitors that have already utilized bankruptcy reorganization to lower their debts and expenses (especially labor costs), not as a last gasp play for survival. It is flush with cash ($4.1 billion on hand, $6 billion-plus in revenue generated quarterly) and has stated that "the need for debtor-in-possession financing is neither considered necessary nor anticipated."
Therefore, many of the negatives often associated with a major airline bankruptcy filing—vendors and suppliers not getting paid, for example—are not factors in AA's case. That means the fallout from the bankruptcy is not likely to have much impact on the rest of the industry. -Aaron Karp