American Airlines’ bankruptcy to have ripple effect on DFW

4 Dec

“In the short term, we’re not going to see any effect,” he said. “Longer term, American’s economic impact in the region is likely to be smaller a year from now than it is today.”

If the company cuts jobs, it would continue a trend under way for a decade.

Since 9-11, the number of jobs in air transportation has declined by 35 percent in the Fort Worth-Arlington metropolitan area. They now make up 2.9 percent of payroll employment, down from 4.8 percent just before 9-11.

If the company eventually merges with another airline, the impact could be larger.

Employees, retirees

AMR has long been Tarrant County’s largest employer, and the airline’s employees and retirees are likely to be among the first to feel the consequences of bankruptcy.

“Anything they do to lower labor costs is going to impact employees who live here,” said Terry Clower, director of the Center for Economic Development and Research at the University of North Texas in Denton.

Before it filed for bankruptcy, American had made contract offers to its employee unions that generally included raises. But now those offers are off the table, and the carrier leaves little doubt which way it expects its payroll costs to move.

In a statement last week, AMR said that “given American’s need to achieve a more competitive cost structure, it is likely changes will be necessary in the future.” It goes on to note that its existing pay and benefit packages “generally place us at or near the top of the industry.”

According to its latest regulatory filings, AMR paid nearly $4.8 billion in wages and benefits to its 88,000 employees during the first nine months of the year, or $81 million more than in the same period a year earlier. More than a quarter of those workers are in North Texas.

And then there are retirees, an undetermined number of whom live in North Texas.

“If American Airlines follows the other legacy carriers and drops the pensions on the government, that could hurt,” Clower said.

The early estimate on how much it could hurt: roughly $1 billion.

The Pension Benefit Guaranty Corp., the federal agency that stands behind traditional defined-benefit retirement plans like AMR’s, said last week that if the airline turns over its underfunded pension plans to the agency, it expects to pay about $17 billion of the company’s $18 billion in promised future benefits.


The rest will simply be lost by higher-paid retirees whose annual pensions exceed the agency’s maximum insured benefit.

“The payroll a year from now is going to be less. That’s just inevitable,” Weinstein said. “But keep in mind the North Texas economy generates about $120 billion a year, so the impact is small.”


Size matters

A big unknown is how much American might cut its flight schedule, both systemwide and at DFW Airport.

American Airlines and American Eagle, AMR’s regional carrier, account for about 85 percent of traffic at the airport and 83 percent of landing fees. And the airport recently started a $1.9 billion renovation of its original terminals.

Wall Street analysts say American will cut 5 to 15 percent of its schedule systemwide. But Mike Boyd, principal of Boyd Group, a Colorado aviation consultant, thinks those expectations are way off base.

“American Airlines didn’t file bankruptcy to shrink. They filed bankruptcy to shed pension costs and debt,” he said.

“We don’t see a material reduction in the size of American Airlines, except they will materially shrink American Eagle,” Boyd said. But even in that event, he said, cutting American Eagle flights means “DFW will lose some spokes that don’t carry many people anyway.”

In Boyd’s view, American is already flying its mainline fleet at record load factors — the percentage of seats filled with customers — so there’s no point in slashing flights.

Judging by what occurred in other bankruptcies, DFW Airport’s position as a dominant hub for American should be an advantage.


In the first year after filing for bankruptcy, United Airlines trimmed capacity by 17 percent, Northwest by 6 percent and Delta by 4 percent, according to the federal Bureau of Transportation Statistics. But United fell by about half that at Chicago O’Hare Airport, while Northwest slipped just 1 percent at its Detroit hub. At Atlanta Hartsfield Airport, Delta actually added nearly 2 percent.

Richard Butler, an aviation researcher and professor of economics at Trinity University in San Antonio, said, “I think it’s likely American will shrink its footprint, but the DFW hub will still be very large.”

Municipal taxes

If municipalities that depend on AMR’s hefty property tax payments face shortfalls, it won’t happen for a while.

Tarrant County, Grapevine and the Grapevine-Colleyville school district allow AMR to break its annual property taxes into two payments. A payment was due Wednesday, and officials said it was made that day.

In any event, “we are first priority as far as debt payments” when the carrier wraps up its bankruptcy, said Elaine Cogburn, the school district’s chief financial officer.

If AMR’s bankruptcy stretches on and the district doesn’t receive the company’s next tax payment, due Jan. 31, “state aid would kick in” under Texas’ school-funding system, Cogburn said.


Money in the bank

Since 1990, 189 U.S. airlines have filed for bankruptcy, some more than once. In that time, industry officials have had plenty of opportunity to see what works and what doesn’t.

What didn’t work was DFW-based Braniff International’s decision to fly until it ran out of money, at which point it grounded its fleet of candy-colored planes starting the afternoon of May 11, 1982, and filed for bankruptcy early the next day.

The Braniff name didn’t appear back in the skies for more than two years, and then as only a sliver of its former self.

“AMR was wise” to file when it still had $4.1 billion in its treasury, Boyd said. That gives management more control over the months-long bankruptcy, he said.

That “cash cushion,” as Weinstein termed it, is more than any of the other U.S. carriers had entering bankruptcy.

United Airlines had $1 billion in cash when it filed in 2002. Delta had $1.7 billion when it filed for bankruptcy Sept. 14, 2005, just minutes before Northwest Airlines filed while holding $2.1 billion.

For that and other reasons, most of the industry observers contacted for this report had a largely positive view of the decision to go to bankruptcy.

“My own reaction was, It’s good news,” said Texas Christian University professor Dan Short, who calls himself an interested observer of the finances of area companies.

“I think you would have seen American Airlines slowly bleed to death” without it, an outcome he termed “devastating” for the area.

Boyd weighed in with a similar analysis.

“When American cleans up its overhead” by jettisoning some debt and pension obligations, he said, “they will be a stronger competitor.”


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