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Tuesday, November 29, 2011

AA goes bust

I space my blogs entries about three days apart and usually have a backlog of topics. My plan to blog today changed at sunrise when I learned that American Airlines is bankrupt.

For 25 years, AA and its partners have gotten 90% of my airline business totaling several hundred thousand dollars of airline tickets. I belong to the Admirals Clubs, two of which I visited yesterday, and I have lifetime Platinum status with nearly 3,000,000 "butt in seat" miles. Offhand I can list 69 airports that I have flown into or out of on AA. This year I've been virtually commuting to work in the UK on AA.

Nevertheless I never owned stock in AA's parent AMR Corp -- nor would I have seriously considered it. Most airlines are big losers financially. All the other major airlines in this country, except Southwest, have been bankrupt at least once. From an investor's perspective, Southwest has done poorly over the last 10 years; they've lost their financial magic.

AA turned a profit for only 2 of the last 10 years. By real-world accounting, Nortel was unprofitable over a similar duration. It's no surprise that both of them went bust.

Unlike Nortel, I expect AA to emerge from bankruptcy in late 2012 or early 2013 mostly intact. The impact of bankruptcy will be primarily on current and former AA employees, as it was at Nortel. Inevitably some retirees will see a reduction in their benefits, some employees will lose their jobs, and some employees who retain their jobs will find that their compensation and benefits are reduced. I had this happen to me as a consequence of Nortel's failure. At best, it's an unpleasant process to endure. I empathize with them.

By the way, former CEO Gerard Arpey has apparently left the employ of AA without the usual golden parachute. His AA stock is, of course, nearly worthless. This is as it should be. I don't object to CEOs who share in the wealth their companies create, up to a point. I certainly do object, however, when CEOs create a risk-free fortune for themselves. Arpey did not.