American Airlines' Last-Mover Disadvantage

When American Airlines parent AMR filed for bankruptcy on Nov. 29, the biggest question wasn’t how could this happen, but why didn’t it happen sooner? As the last of the so-called legacy carriers to seek court protection from creditors, AMR has for years operated with higher labor costs and debt than its peers. It’s on track to post its fourth straight annual loss, estimated to be $1.2 billion in 2011, while United Continental and Delta Air Lines managed to make money in the first nine months of this year. By holding out so long, American may have missed the opportunity to merge and create a more lucrative network. Bankruptcy protection will allow AMR to cut costs, but it won’t eliminate the advantages now enjoyed by its biggest rivals.

In most businesses, the stigma associated with seeking court protection from creditors makes the bankruptcy option an absolute last resort. Yet when an entire industry is under tremendous financial pressure, that hang-tough strategy may not be the shrewdest move. While General Motors and Chrysler filed for bankruptcy and simply walked away from many obligations, Ford Motor borrowed money to pay off its debts. Noble, perhaps, but that’s left Ford with more than $12 billion in debt, almost three times as much as GM. Ford had clear motives to stick it out: Not only did having a common auto union allow it to win similar labor concessions as its rivals, but the reputation hit of bankruptcy arguably carries more weight when buying a vehicle than an airline ticket.