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American Airlines Bankruptcy ‘Chapter 11′ To Cut Costs

11/30/2011 03:23 AM ET

American Airlines Bankruptcy - The airlines and its parent company, AMR Corp, has filed for bankruptcy protection on Tuesday to cut costs and combat soaring fuel prices and dampened travel demand. It is the only major U.S. carrier to avoid Chapter 11 in the last decade and consequently has the industry’s highest labor costs. The airline was once the largest U.S. carrier, but now falls to third behind United Airlines and Delta Air Lines.

The company hopes to cut labor costs after it failed to reach a deal with pilots and other work groups after years of fruitless negotiations. However, analysts question whether restructuring will address operational shortcomings and bolster revenue. The filing also leaves AMR vulnerable to unsolicited takeover bids by rival airlines in the rapidly shrinking airline industry.

“It completes the cycle,” said Helane Becker, an analyst with Dahlman Rose & Co. “Every major airline in the united States has filed for Chapter 11.”

In its bankruptcy filing, AMR said its cost-cutting in recent years had been insufficient and that it could not continue without changing its “uncompetitive cost structure.”

“Without addressing the realities of the marketplace, AMR cannot be competitive with its peers,” it said.

Shares of AMR tumbled 1.39 percent in early trade to 23 cents on the New York Stock Exchange. Stock in bankrupt companies typically is wiped out when a company exits Chapter 11 and new shares are issued, making the old shares worthless.

Shares of rival airlines rallied in early trade on expectations that fares industry wide could rally if American Airlines sheds some of its cost burdens. Experts said the carrier has kept fares low and spoiled industry-wide fare hikes as it struggled to keep its airplanes full.

Shares of United Continental were up 7.7 percent at $17.86 on the New York Stock Exchange. Shares of US Airways Group were up 10 percent at $4.70 on NYSE. Shares of Delta Air Lines rose 4.44 percent to $7.76 on NYSE.

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