The ball seems to be rolling at American Airlines (NYSE:AMR) as the airline looks to shake up management to get its house in order. It has been a busy month for the Fort Worth, Texas based company after it filed for bankruptcy protection under Chapter 11 at the end of last month.
In its first move after the filing, American streamlined its senior leadership team. Two of the most notable changes were in Employee Relations and Flight Operations departments, two areas that have been American’s constant headache in the past few years. Also Tom Horton, earlier president of AMR Corporation – American’s parent company, took the additional jobs of chairman and CEO. The entire move is not very surprising though, as shuffling the management is the first step most companies are likely to take when restructuring the company. (See American Airlines Announces Key Leadership Changes Supporting Its Restructuring Plan, Press Release, Dec 6)
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In another move that could well define the start of over-hauling the entire aging fleet, early Thursday American got permission from a special U.S. Bankruptcy Judge in Manhattan to pursue a deal with Boeing Co. (BA) to buy 32 planes through 2012.
Notably American has a pending order of new 737-800s and 737 MAX with Boeing Co, along with A320neo with Airbus. American also secured permission to reject leases on some of the older aircrafts. While it did not disclose the amount involved, most of this excess leased equipment is not in service and is “languishing in expensive storage space without generating any value”. (See AMR Can Reject Some Engine, Aircraft Leases, Bankruptcy Court Judge Rules, Bloomberg, Dec 23)
While these moves are encouraging, what still remains to be seen is how the new management team approaches the labor negotiations. It’s the elephant in the room and unless American can rationalize its industry leading labor costs, it will have to fight really hard to be competitive again with legacy peers including Delta (NYSE:DAL) and United Continental (NYSE:UAL) and low-cost carriers alike.
Note that the Trefis analysis for American Airlines reflects a pre-bankruptcy equity valuation for the firm and considered cautiously as many items including the profitability of its operations and indirect costs that could change substantially post-bankruptcy.
It’s too early in the process to make assumptions on American’s equity value exiting bankruptcy as the carrier will renegotiate items like its legacy defined benefit plans, future labor contracts and debt structure.
These steps should make the airline more competitive going forward and could improve the long term outlook for the airline. Given the currently uncertainty and limited information at this point, we caution investors from relying on the presented data and analysis as an accurate value of the airline going forward.