American Airlines files for bankruptcy – three lessons from a struggling icon

An icon of the aviation industry, American Airlines, has filed for Chapter 11 bankruptcy in the United States after years of suffering from higher costs, oil prices and competition from low-cost carriers.

The move – pushed by parent company AMR – comes as the industry as a whole is continuing to struggle from higher prices and restructuring efforts, including in Australia as well.

American Airlines was rumoured to have been considering bankruptcy earlier this month. Now, the firm has confirmed it will file and start looking for ways to cut down rising costs.

“Chapter 11 reorganisation is in the best interest of the company and its stakeholders,” the company said in an early Tuesday morning statement, which also confirmed the departure of chairman and chief executive Gerard Arpey.

The collapse has a local effect too, as Qantas operates a code-sharing agreement with the company. However, both have said it’s business as usual for the time being.

A number of airlines in the United States have been forced to merge with others in order to survive, and some commentators believe American will do that now, with US Airways being one company named.

But as some analysts point out, the company could have prevented this happening much earlier. Here are three of American Airline’s key mistakes:

A lack of forward thinking

When the September 11 terrorist attacks occurred, many of the major US airlines filed for bankruptcy protection provisions given the industry had come to a halt for several weeks. But American Airlines was the only company to avoid taking that route.

Analysts suggest that was a mistake, meaning other companies were able to remain flexible with their arrangements and strategy. Instead, American Airlines was restricted in what it could do to survive.

Another key factor here is that bankruptcy protection would have allowed the company to control its costs. Because it didn’t take that route, costs have risen – along with losses, as rivals continue to post profits.

Taking this action 10 years ago may have saved the company from having to go through it all now. And with higher oil prices and a consumer base less willing to spend, it’s only going to be several times harder.

No response to competition

Over the past decade a number of low-cost airlines have emerged, threatening the bigger carriers. More regional airlines have taken up the slack for a lot of smaller routes, which passengers tend to like more as they can get them into smaller destinations.

This is an industry-wide problem, with Delta and other airlines suffering from the growing dominance of JetBlue and Southwest. But so far, American Airlines hasn’t responded with any meaningful competition, only choosing to borrow more.

Because of this lack of diversification, it hasn’t posted a profit in three years, despite other airlines making good returns.

Although the company has expanded into Asia, and has offered a few different routes to diversify, it hasn’t been enough to survive.

An aging fleet

Part of the problem with facing newer airlines is that their equipment tends to be much newer. American Airlines, on the other hand, hasn’t upgraded its fleet for quite awhile and is still using fairly old planes.

Despite an order for new craft, the old fleet has some significant problems. They churn more fuel, and are simply more expensive to operate and maintain. Meanwhile, other airlines have been upgrading their fleet with less fuel-heavy equipment.

This also leads to a poor brand reception as well. Customers want newer planes that appear safer and more comfortable. American Airlines has let its fleet age, and as a result, just isn’t as trusted.