Fitch: AMR Restructuring to Boost Industry Revenue Fundamentals

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CHICAGO--(BUSINESS WIRE)-- Today's Chapter 11 filing by AMR Corp. and its American Airlines subsidiary opens yet another window for structural change in the U.S. airline industry. Fitch Ratings expects AMR's bankruptcy reorganization to drive additional cuts in industry capacity, boosting revenue fundamentals for AMR's principal competitors.

While new Chairman and CEO Tom Horton has emphasized his desire to avoid dramatic shrinkage of the AMR route network while in bankruptcy, the forthcoming restructuring will inevitably involve significant fleet changes and additional pruning of unprofitable capacity across the American and American Eagle networks. In particular, AMR is likely to focus on the need to dramatically downsize its fleet of high-cost MD80 narrowbody aircraft, which have contributed to the carrier's large cost disadvantage in recent years.

Wage concessions in renegotiated labor contracts, as well as the expected termination of AMR's substantially underfunded defined benefit pension plans, will lie at the heart of the airline's reorganization plan. In addition, restructuring or rejection of some aircraft debt and lease obligations will be necessary for AMR to create a sustainable capital structure for the long term. Unsecured debt levels are small relative to total debt outstanding of more than $10 billion, underscoring the need to pursue deeper cuts in MD80-related secured debt and lease obligations.

In order to remain viable after emergence from Chapter 11, AMR will need to maintain a network presence in its key domestic "cornerstone" markets (Dallas, Chicago, Miami, New York, and Los Angeles). However, delivery of new narrowbody aircraft is unlikely to occur quickly enough to avoid material capacity reductions in 2012 and beyond. As the No. 3 U.S. carrier in terms of available seat mile capacity, a significant downsizing of the AMR network could have meaningful positive effects on industry yields and unit revenue moving into 2012.

Ultimately, we expect AMR's filing to reinforce the industry's recent efforts to maintain capacity discipline and rising fares in the face of high jet fuel costs and an increasingly challenging macro outlook.

While a potential combination between AMR and US Airways remains dubious in light of potentially insurmountable labor integration hurdles, AMR may ultimately face the need to consider a merger as the only path to strategic relevance in an industry where global network scale and scope is more important than ever.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Additional information is available on www.fitchratings.com

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Fitch RatingsBill Warlick, +1-312-368-3141Senior DirectorFitch WireFitch, Inc.70 W. MadisonChicago, IL 60602orStephen Brown, +1-312-368-3139Senior DirectorCorporatesorMedia Relations:Brian Bertsch, +1-212-908-0549Email: [email protected]

Source: Fitch Ratings

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