AMR Corp.’s fleet is due for a substantial overhaul now that the company’s American Airlines and American Eagle Airlines divisions are under Chapter 11 bankruptcy protection.

Fleet plans had already been initiated by AMR, with a major narrowbody upgrade program using both Airbus and Boeing aircraft announced in July and a suspended divestiture of Eagle reducing that airline’s regional jet operations over the next decade. But with yesterday’s filing in the U.S. Bankruptcy Court for the Southern District of New York, the fleet plan takes on a new, more earnest pace, with AMR now better able to reject leases and renegotiate payment rates.

“We cannot afford to retain all the aircraft currently in the American and American Eagle fleets at their current rates, and so we have no choice but to make substantial reductions in the cost of the aircraft which we retain. Moreover, in view of the large number of aircraft we have on order from Airbus and Boeing, we also seek to accelerate our fleet renewal strategy and, as a result, we do not require the use of all aircraft currently in our fleets,” AMR tells lessors and lenders in an open letter.

American Airlines currently operates some 600 mainline aircraft, and Eagle’s fleet contains nearly 300 regional aircraft. AMR already has targeted 120 or so Boeing 757-200s, a handful of Boeing 767-200ERs and more than 200 MD-80s for eventual replacement with the new Airbus and Boeing aircraft. Also, a large part of Eagle’s 50-seat Embraer RJ fleet, which accounts for all but 47 of its operational aircraft, already is targeted in the divestment plan.

“Additionally, to conserve our liquidity, subject to the requirements of the U.S. Bankruptcy Code, during the 60-day Section 1110 period, we plan to make payments when due of aircraft rent and mortgage principal and interest payments only on certain aircraft in our fleets,” the company adds.

It is still unclear which aircraft AMR intends to drop and, in an interview with Aviation Week, Senior VP-Customer Experience Craig Kreeger would only say that such aspects of the reorganization are still being determined. Indeed, the same applies to many key elements of the restructuring, with the fate of AMR’s maintenance facilities in Tulsa, Okla.; Fort Worth and at Dallas/Fort Worth International Airport (DFW) as uncertain as the various labor agreements currently being negotiated by AMR’s two operating units.

Payroll Disparity

Labor costs are the primary concern for AMR, which for years has noted the disparity between its payroll and those at peers including Delta Air Lines, United Continental Holdings and US Airways, all of which have used Chapter 11 to revise their work rules and pay scales. Gerard Arpey, who is retiring as chairman and CEO, was adamant that his company would be able to restructure without the aid of a bankruptcy court—and even completed a drastic, albeit failed, overhaul in 2003.

However, at an unscheduled board meeting late on Nov. 28 that executive decision was overruled by the company’s directors, who were increasingly concerned that the cost disparity, the expansion of U.S. low-cost carriers, a volatile share price, high fuel costs and a pessimistic outlook for 2012 would exacerbate AMR’s weakened financial state.

The board also asked Arpey to stay at AMR as chairman and CEO, say insiders, although it was no surprise when he chose to tender his resignation. President Tom Horton, who is understood to appreciate the benefits of using Chapter 11 to restructure a company, is assuming Arpey’s responsibilities.

“This was a difficult decision, but it is the necessary and right path for us to take—and take now—to become a more efficient, financially stronger and competitive airline,” says Horton. “We have met our challenges head on, taking all possible action to secure our long-term position. In recent years, even as the airline industry faced unprecedented challenges, American strengthened our domestic and global network; fortified our alliances with the best partners around the world; launched a transformational fleet deal that will give American the youngest and most efficient fleet in the industry; and invested in our product, service and technology to build a world-class customer experience.

“But as we have made clear with increasing urgency in recent weeks, we must address our cost structure, including labor costs, to enable us to capitalize on these foundational strengths and secure our future,” Horton adds. “Our very substantial cost disadvantage compared to our larger competitors, all of which restructured their costs and debt through Chapter 11, has become increasingly untenable given the accelerating impact of global economic uncertainty and resulting revenue instability, volatile and rising fuel prices, and intensifying competitive challenges.”

Legislators are worried this means an end to AMR’s defined benefit pension plans, notably Kay Bailey Hutchison (R-Texas), ranking member of the Senate Commerce, Science and Transportation Committee, who said she remained “concerned about the company’s pension plan…being placed in jeopardy by this unfortunate turn of events.” Ominously, the senator also noted that AMR’s pensions are “one of the most generous in the industry.”

While bankruptcy generates a lot of uncertainty, AMR is using the first hours of its court protection to clarify key aspects of its plan, notably its commitment to its “cornerstone” strategy, which focused the network around its operations at DFW, Chicago O’Hare International, New York John F. Kennedy International, Los Angeles International and Miami International airports. Headquarters will remain in Forth Worth, adds AMR. The company is also keen to stress that its operations will not be immediately affected by the bankruptcy filing.

Speculation about a possible merger, however, will be fueled by AMR’s noncommittal statements that any and all possibilities will be investigated during the reorganization.

No DIP Financing

AMR is also choosing to finance its Chapter 11 reorganization with $4.1 billion in cash and short-term investments (with investments accounting for almost $4 billion of the total) rather than the debtor-in-possession funding usually favored during such bankruptcies. This tactic will enable the company to circumvent some restrictions and may expedite the reorganization, but at this early stage the full benefits are unclear.

Bankruptcies take time, and while AMR is avoiding all comments on the bankruptcy process, its pilots union, the Allied Pilots Association (APA), is telling members an 18-month time line has been allotted for restructuring.

Two of the operator’s unions blame management for failing to use the 2003 concessions to avoid this outcome, with APA noting that “we find ourselves working for an airline that has lost its way,” and the Transport Workers Union (the largest labor group at AMR) saying it “will fight like hell to make sure that frontline workers don’t pay an unfair price for management’s failings.” The Association of Professional Flight Attendants, meanwhile, expressed its confidence AMR will work closely to “ensure that a reorganized American regains its position as the premier U.S. carrier.”