Excess baggage

IN BUSINESS, virtue is not always rewarded. Ford briefly gained some kudos among politicians and the public for being the only one of Detroit's big three carmakers not to file for bankruptcy in the wake of the financial crisis, but the firm is now stuck with higher costs than its rivals. The same was true of AMR, the parent company of American Airlines, one of the few big American carriers to have resisted using the bankruptcy laws to shed its liabilities to shareholders, creditors and its pension scheme. Continental has gone through bankruptcy twice (in 1983 and 1990), as has US Airways (2002 and 2004).

However, on November 29th AMR abandoned its noble stance and filed for Chapter 11 bankruptcy, saying that this had become necessary for the firm “to achieve a cost and debt structure that is industry competitive and thereby assure its long-term viability”. Although the company has liabilities of around $30 billion, it has $4.1 billion of cash at hand, which it insists is more than enough to keep it flying during its restructuring. Passengers, staff and suppliers should notice no difference, it promised. Gerald Arpey, the airline's boss, will step down in favour of the number two, Tom Horton, who is believed to have been more open to shedding liabilities through the bankruptcy courts.

Network airlines are, in America and much of the rich world, licences to lose money or make miserly returns—and AMR is certainly no exception. It has lost money in all but two of the past ten years, and was expected to run up more losses this year and next. The darkening outlook for the world economy means the chances of turning a profit any time soon are receding. Not only have American's main rivals shaken off their pension costs and other liabilities; some have grown bigger and trimmed expenses through mergers (United with Continental and Delta with Northwest). After losing a few pounds in its restructuring, American may become a more attractive marriage partner, perhaps for US Airways.

Recently, as fears of a bankruptcy filing grew, there was a rush among American's older pilots to retire to capture their pension benefits, which are likely to be cut in the restructuring. The airline had been talking to its pilots for five years about new contracts that would allow it to reduce its costs, but neither these nor the company's talks with cabin crews and mechanics had got very far. The lack of progress in the talks with the pilots' union has also hindered AMR's plan to spin off its regional airline, American Eagle, another key part of the group's cost-cutting plan. Presumably the bankruptcy filing will now help to concentrate minds at the negotiating table.

Perhaps the most ambitious part of AMR's plan to break through the clouds into profitable blue skies is the huge orders it recently placed with Boeing and Airbus. The idea is to replace its ageing fleet with new aircraft that are much cheaper to run. A senior AMR executive recently acknowledged that the two planemakers had made a leap of faith in allotting such a big chunk of their future production to American, but insisted that this showed they regarded the firm as reliable. This will probably not change as a result of the bankruptcy filing: indeed, by allowing AMR to shake off some of its liabilities and cut its future costs, it will be in a better position to pay for those shiny new planes.