Another Chapter 11 Written in a Sad Industry

To say I wasn't surprised would be a lie, but I thought it wouldn't be for another few months.

The market awoke to news this morning that American Airlines and American Eagle parent AMR (NYSE: AMR  ) had filed for Chapter 11 bankruptcy protection, making it the last of the major carriers to do so in an industry wracked by bankruptcies and mergers since September 2001. AMR believes its $4.1 billion of cash, as well as cash from ongoing ticket sales, will be enough to operate through the bankruptcy process. The airline also announced the retirement of current CEO Gerard Arpey, who will be replaced by Thomas Horton.

Business as usual for airlines
The primary reason for the bankruptcy filing was out-of-control labor costs that gave AMR a disadvantage over nearly all of its competitors. This $800-million-a-year cost disadvantage combined with the inability to restructure debt led to the Chapter 11 filing. Despite these debt costs, AMR plans to go ahead with its recent order of 460 new planes, including 200 new 737s from Boeing. These planes are needed to update its aging fleet, though it feels strange for a company to buy brand new jets while losing $4.8 billion over the past three and a half years, with losses expected to continue through at least 2012.

Not all airlines are created equally
Despite industrywide profitability problems, there are a few bastions of hope away from the major carriers. Last year marked the 38th consecutive year that Southwest Airlines (NYSE: LUV  ) has been profitable, a trend that is expected to continue this year. Allegiant Air (Nasdaq: ALGT  ) operates a regional airline focusing on leisure travelers, serving airports that have limited or no service from major carriers, and it recently reported its 35th consecutive profitable quarter. JetBlue (Nasdaq: JBLU  ) has returned to profitability after an $84 million loss in 2008, posting profitable years in 2009 and 2010.

What's ahead for AMR?
While I don't think this bankruptcy will eliminate American Airlines as a major carrier, the possibility exists. Other major airlines such as Delta Air Lines (NYSE: DAL  ) and United Airlines used bankruptcy protection to cut costs and acquired other bankrupt airlines, with Delta purchasing Northwest Airlines and United merging with Continental to become United Continental Holdings (NYSE: UAL  ) . Even US Airways (NYSE: LCC  ) got in the act when America West purchased the airline and retained the more widely known US Airways name.

It wasn't that long ago that American Airlines was the largest carrier in the world. I don't think that will happen again anytime soon, though it is possible for it to look for another airline to merge with.

These things take time to resolve, so if you want to follow the latest developments, add AMR to your free My Watchlist.