Tags: AMR | Bankruptcy | Risk | pilot

AMR Bankruptcy Risk Rises as Lack of Pilot Deal Narrows Options

Wednesday, 16 Nov 2011 10:46 AM

 

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AMR Corp.’s board may need to weigh a bankruptcy filing after a second round of stepped-up talks with American Airlines pilots failed to produce an agreement on a new, cost-saving contract.

Directors should consider alternatives now rather than watch cash reserves keep dwindling without a labor accord, said Jeff Kauffman, a Sterne Agee & Leach Inc. analyst in New York who cut his rating on AMR yesterday to “neutral” from “buy.”

“Liquidity is going to be whittling away over the next six months,” Kauffman said in an interview. “That pile is going to get to a level where the company feels they need to make a strategic decision. We are not there today and might not be in six to nine months, but my guess is we are within 12 months.”

The board meets today in the last such scheduled session of 2011 as Fort Worth, Texas-based AMR heads toward a fourth straight annual loss. American posted a pilot contract offer online on Nov. 14 after negotiators fell short of a goal of winning a deal for directors to review.

The Allied Pilots Association began its own three-day board meeting yesterday, and a spokesman, Tom Hoban, said the union would have no comment until it reviews American’s proposal. Accelerated bargaining before an October meeting of AMR’s board also failed to produce an agreement in talks that began in 2006.

Bankruptcy isn’t “a goal or preference,” according to AMR, which ended the third quarter with $4.3 billion in unrestricted cash and short-term investments. AMR declined to discuss the board’s agenda, said Sean Collins, a spokesman.

Assessing Options

AMR sank 10 percent yesterday to $1.92 in New York, its lowest closing price since March 2003, a month before union workers agreed to $1.6 billion in annual concessions to avert bankruptcy. The shares fell 75 percent this year before today.

William Warlick, a Fitch Ratings credit analyst in Chicago, said the company has to evaluate options now rather than awaiting a pilot vote that would be months away even if the union accepted the latest proposal. The seasonal drop in U.S. air travel only adds to AMR’s financial strain, he said.

“The risk profile is changing as we get into the area where management is actually starting to more explicitly suggest a bankruptcy filing is coming,” Warlick said in an interview. “There is sufficient cash to get through the winter but, ultimately, the timing” of a filing may depend on having to act before those reserves get too low.

Labor Costs

American has sought new contracts to boost productivity and pare the industry’s highest labor costs as a percentage of sales. Pilots are a bellwether work group at U.S. carriers, and American has focused on an APA accord to spur progress in talks with flight attendants and mechanics.

Bankruptcy alternatives such as scaling back operations to cut costs aren’t very attractive because American already has been overtaken in passenger traffic by United Continental Holdings Inc. and Delta Air Lines Inc., said Jeff Straebler, an independent aviation analyst in Stamford, Connecticut.

“Shrinking much more than peers is unlikely to result in a turnaround,” Straebler said yesterday. “It would probably make more sense to file and rationalize the business under bankruptcy.”

American and the pilots held out renewed hope for a deal last week. The airline said Nov. 8 that “we believe we can reach a tentative agreement with the APA in the days ahead,” and union President David Bates said the same day he was “very hopeful” an accord could come in a week.

Then bargaining recessed over the weekend, resumed for a day on Nov. 14, and was put on hold as the union and AMR boards prepared to meet.

‘Increasingly Likely’

“It seems increasingly likely that AMR will fail to reach agreements with its unions soon enough and effective enough to keep the company out of bankruptcy,” Vicki Bryan, a senior bond analyst with New York-based Gimme Credit LLC, said in a report.

Bryan, who has an “underperform” rating on AMR debt, said the company “will most likely be hit harder than its larger peers” in any travel decline in a fourth quarter already “shaping up to be a lump of coal for the industry.”

AMR’s 10.5 percent bonds due in October 2012 fell 1.19 cents to 94.56 cents on the dollar, according to the Financial Industry Regulatory Authority. The yield rose to 17.18 percent.

The cost to protect AMR debt from default for five years soared to the highest since July 2008. Credit-default swaps rose 3.2 percentage points to 68 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $6.8 million initially and $500,000 annually to protect $10 million of debt.

Credit Protection

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. CMA, which is owned by CME Group Inc., compiles prices quoted by dealers in the privately negotiated market.

Pilots and the airline traded statements late yesterday reaffirming their interest in reaching an agreement through bargaining.

“APA leadership shares your desire to conclude negotiations expeditiously,” the union wrote in a letter to AMR Chief Executive Officer Gerard Arpey. Missy Cousino, an airline spokeswoman, said in an e-mail that American looks forward “to resuming negotiations with the APA regarding what we believe to be fair and reasonable proposals.”

Pay Gap

While American’s posting of the contract on a company website put the offer in front of rank-and-file APA members, not just union negotiators, the move also spotlighted the gap between the two side on pay.

The company offered two options on points such as compensation, productivity, pensions and benefits. One plan would give pilots a 4 percent average raise on the date the contract is signed, a 3 percent boost after 15 months, and increases of 2 percent after 30 months and after 45 months.

The second option offers a 5 percent average increase at signing, followed by a 4 percent jump after 12 months, a 2 percent increase after 24 months and 3 percent after 36 months.

Pilots had sought a 10 percent signing bonus, followed by 7 percent raises in each of the next three years. Hoban, the union spokesman, said Nov. 13 that the figure was “pretty reasonable.”

Kauffman, the Sterne Agee analyst, said winning new labor agreements would position American to renegotiate contracts with lessors and vendors to further pare costs. The airline also has to weigh the risks of waiting for an accord that may not come, because preserving cash ahead of a Chapter 11 filing would boost the chances for a successful restructuring, he said.

“The union needs to consider a new proposal, management needs to consider its alternatives,” Kauffman said. “That’s what these meetings are about over the next two days.”

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