Just hours into its court-protected reorganization, AMR Corp. has started overhauling its fleet and, as expected, its MD-80s are the primary target.
The operator’s Nov. 29 initial bankruptcy filing clearly stated that its cost structure forced the company into Chapter 11, and that labor and fleet expenses must be reduced forand Airlines to survive. For the fleet, this means rejected leases and renegotiated financing packages. In the late hours of AMR’s first day in bankruptcy, the first part of that strategy was launched.
Twenty MD-80s and four Fokker 100s are listed in AMR’s first motion since its Chapter 11 filing was approved by Judge Sean Lane of the U.S. Bankruptcy Court for the Southern District of New York. According to AMR, these aircraft are either parked or will be dropped from the operational fleet before the end of December, and so are eligible for “surrender and return” conditions under U.S. bankruptcy law.
“When the debtors entered into the leases, they anticipated the additional aircraft and engines would be necessary to meet the needs of the flying public. Today, with the ongoing downturn in the economy and in travel, these same aircraft and engines have little if any marketable value and are no longer necessary to the debtors’ operations,” says AMR in its motion.
“The majority of the excess leased equipment has already been taken out of service; the remainder will be taken out of service on or before the applicable effective date. Consequently, the unused equipment is languishing in expensive storage space without generating any value for the debtors’ estates, and the excess leased equipment is nothing more than a cash drain on the debtors’ businesses.
“If the rejection of the leases is approved, the debtors will maintain sufficient aircraft and engines to operate their businesses and meet their passengers’ needs,” AMR adds.
Ominously, the operator also notes that “in view of the large number of aircraft American Airlines has on order, it seeks to accelerate its fleet renewal strategy. To meet all of these goals, the debtors are analyzing the benefits of rejecting leases, selling and abandoning owned aircraft and engines, and contemplating methods for the return and surrender of rejected and abandoned aircraft and engines. As a result, the debtors will seek to retire numerous aircraft and engines from their fleet through rejection and abandonment. This motion is a step in that process.”
AMR currently operates 858 aircraft according to the Aviation Week Intelligence Network database, although close to 680 (including almost all its regional jets) are owned. Of the remaining 180 leases, 85 are for MD-80s, a type already scheduled for replacement with American Airlines’ July order forand narrowbodies, while 76 more are on , a fleet American intends to expand. The few remaining leases are spread between -200s (nine); -300ERs, (five); 767-200ERs (one); -200ERs (three); and a single .
While it is unclear how this fleet will be revised, American is already signaling a commitment to its largest aircraft type, with the Nov. 30 announcement that an order for 777-300ERs due to enter its fleet in 2012 and 2013 not only has increased to 10 aircraft (one more than confirmed just last week), but also will offer a new three-class cabin with lie-flat seats in first and business and a two-tiered economy class like many of its rivals. There is also an indication that these aircraft will offer inflight connectivity, but details are not being disclosed.
This bankruptcy means that every U.S. legacy carrier has used Chapter 11 at least once to restructure its operations, and as with the previous reorganizations, approval was granted within hours of the filing.
The approval enables AMR to maintain normal operations and continue paying post-petition bills while restructuring its debt. Because AMR has chosen to fund the Chapter 11 process from cash reserves, rather than debtor-in-possession financing, it should find that, for now, it is less hindered than its peers were during their bankruptcies as it does not have to answer to a major financier’s demands.