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US airlines' backdoor bailout


American Airlines' (AA) Chapter 11 bankruptcy filing is largely being treated as ho-hum news. After all, it was the last of the US legacy carriers never to have operated under bankruptcy protection. A US airline restructuring under the oversight of a bankruptcy court is a "well worn path," AA chairman, president and CEO Tom Horton pointed out.

Indeed, with all of the US legacy airline companies (AA, United Continental Holdings, Delta Air Lines and US Airways) having used the Chapter 11 process in the past decade, the industry has achieved via the courts what it could never have through lobbying the US Congress: a huge bailout. While Congress did provide US carriers with financial assistance in the immediate aftermath of 9/11 (which could be sold in part as compensation for the government temporarily shutting down US airspace), an airline industry bailout would have surely been a complete non-starter on Capitol Hill if proposed at any time over the last 10 years.

US airlines' foreign competitors have often grumbled that the Chapter 11 process serves the same purpose as a bailout, practically speaking, and it's hard to argue otherwise. AA is now conceding what its rivals had already admitted: legacy burdens carried by major international US airlines are simply too costly for the companies to be financially competitive.

Filing for Chapter 11 allows US airlines to shed many of those burdens and receive heavy labor concessions, long-term structural savings that likely benefit carriers more than a direct government bailout would. Instead of Congress passing a politically unpopular "Airline Bailout Act" in which billions of dollars are handed to the industry, airlines one by one have used US bankruptcy laws to, in essence, receive a backdoor bailout.

AA's filing has been taken in stride because multiple US airlines have already shown that a carrier can operate quite fine while in bankruptcy, but also because there was no sense of crisis surrounding the Dallas-based company's move. Given that it has more than $4 billion in cash on hand and generates more than $6 billion in revenue each quarter, AA was not in imminent danger of collapse.

Filing for Chapter 11 was a carefully plotted strategic decision, not a desperate play for survival. AA could have filed six months ago, or six months from now, and it likely would have made little long-term difference. While this is certainly in the spirit of the way many US companies, and particularly the airline industry, have used Chapter 11, it is not how "bankruptcy" is generally thought about worldwide. The political distinction in the US between a Chapter 11 filing and a bailout is quite large. Beyond US borders, however, the lines are a bit blurrier.

An entire US industry has saved many billions of dollars (and restructured for long-term survival) using a government monitored process that shielded it from normal marketplace pressures. For all practical purposes, US legacy airlines have been (and, in AA's case, will continue to be) the recipients of a significant bailout package. -Aaron Karp

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