How the American Airlines bankruptcy affects Chicago

November 29, 2011

Midwest fliers have plenty of experience with airline bankruptcies — think United, Northwest and Delta. Now comes another one with a direct impact on Chicago.

American Airlines, which has one of its two biggest hubs at O’Hare International Airport, said today it’s seeking Chapter 11 bankruptcy protection. It is the second largest airline bankruptcy case, behind United.

American said it planned to keep its operations at O’Hare, and has no immediate plans to change its schedule.

American, based in Dallas, is the last of the big “legacy carriers” to reorganize, in part because its chief executive, Gerard Arpey, resisted the step. Rather than lead American through a court case, Mr. Arpey retired, and was replaced today by Thomas Horton. The airline said it hoped to emerge from court protection by mid-2013.

American and United have always fought tooth and nail for business at O’Hare, where United holds a 27 percent share of passenger traffic, and American has 24 percent, according to the Bureau of Transportation Statistics.

But United in recent years has gained financial and size advantages over its rival. United sought bankruptcy protection in 2002, after it failed to get federal loan guarantees, and merged with Continental last year. The combined United and Continental are based in Chicago.

Unlike United’s bankruptcy case, which was heard in Chicago, American’s parent, AMR, filed for bankruptcy protection in New York City. The airline is represented by Weil, Gotshal, the law firm that represented General Motors in its bankruptcy case. Significantly, American is not seeking debtor-in-possession financing; it entered bankruptcy with $4.1 billion in cash, enough to keep its operations running.

In announcing the bankruptcy filing, American said passengers would not notice any immediate change in service, and would continue to collect frequent flier miles. (Answers to frequently asked questions can be found here.)

American’s employees, however, are likely to see some major changes, if the bankruptcies at the other major airlines are any guide.

Under bankruptcy protection, companies can seek to void labor contracts, although judges generally require negotiations on any proposed cuts before they take place. They also can ask that pensions be modified or terminated.

American has a complicated relationship with its pilots, who are represented by the Allied Pilots Association (not the Air Line Pilots Association, which represents pilots at many major airlines). Pilots and the airlines have battled for years over work rules governing pilots at the main airline and its American Eagle subsidiary, which American has tried to sell.

In a hotline message, APA president Dave Bates said it was a “somber day” for the airline.

“While today’s news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way,” said Bates, whose union granted concessions in 2003 so the airline could avoid a bankruptcy filing then.

It’s also likely that the cities served by American will see changes in schedules down the road. While American isn’t expected to give ground at O’Hare, it’s common for airlines to eliminate routes, flights and get rid of expensive aircraft while they are under bankruptcy protection.

Fliers in Cincinnati and St. Louis already know first hand what happens when airlines get in trouble. Cincinnati was a hub for Delta before it merged with Northwest in 2008, and has seen flights drop sharply during the past decade. Likewise, St. Louis was a main base of operations for TWA before American bought it in 2001. It has also seen its service dwindle as American cut flights formerly operated by TWA.

(Note: my father worked for the finance staff of American Airlines for 25 years. Read about my life as an airline child in this story for The New York Times.)