Something Special in the Air

You get what you pay for.

That’s what I thought when I heard about American Airlines’ bankruptcy filing. AMR Corp was the last of the major airlines to file for bankruptcy. The company will continue, but some of their 78 thousand employees will lose their jobs, and shareholders will almost certainly be wiped out.

What went wrong? For decades American was the most innovative carrier in air travel. In 1936 they were the first airline to fly the DC-3, the first plane designed to carry enough passengers to be profitable without making money from mail or cargo. In 1959 they were the first to offer nonstop coast-to-coast jet service on the Boeing 707. They were the first to offer curb-side check-in, the first to use computerized reservations. They invented the frequent-flier program.

But in 1978 Congress deregulated the airline industry. In the cost-versus-quality debate, we voted for lower prices. Discount airlines sprang up: People’s Express, Southwest, JetBlue. Lots of legacy carriers couldn’t adapt to the new world. Famous brands like Pan-Am, Eastern, TWA, or Braniff are no more. Others merged: United with Continental, Northwest with Delta. They also used bankruptcy as a strategic tool to extract concessions from their highly paid union employees.

American’s workers made concessions, but not enough. And the company was slow to adopt newer, more efficient airframes. American resisted bankruptcy for years, betting that passengers prefer a financially sound carrier. Now investors and employees will lose billions. Something special in the air? Not anymore.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-09T17:07:28+00:00 December 1st, 2011|Global Market Update|0 Comments

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