May 13, 2012

The Bankrupting Cost of Airline Bankruptcy

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American Airlines flight attendants protest labor cuts in New York City, April 23, 2012. (Photo by the Association of Professional Flight Attendants)

There are a lot of losers in any corporate bankruptcy. Employees, contractors, debtors and investors always end up taking a haircut. In consumer-facing businesses, like airlines, the company’s brand often suffers as well when services are cut and defeatist employees stop aiming to please.

There are always winners though: The Lawyers and The Consultants.

Terry Maxon of the Dallas Morning News discovered in a recent filing that American Airlines has racked up nearly $60 million in legal and consulting fees since filing for bankruptcy in November.

Demanding context, a reader of Maxon’s post comments that Delta’s 2005 bankruptcy ended up costing $169 million and United, which spent over three years under the umbrella of Chapter 11 protection, shelled out $335 million.

The likely alternative to bankruptcy, of course, would be the much more painful, outright failure of American Airlines. Instead of pay and benefit concessions and some layoffs, every employee would concede his or her livelihood. Debtors would be forced to tussle amongst themselves over American’s few, unmortgaged possessions. It would be ugly.

When you look at it that way, spending $10 million-a-month to figure out how to avoid losing $100 million-a-month doesn’t seem so unreasonable. Then the question becomes: Are all those well-paid suits really earning those checks? Will their work lead AA to become the agile, competitive carrier that it needs to be, either on its own or through a merger? We hope so.

And, for broader context, these airline bankruptcies, while among the largest in US history, pale in comparison to the failed investment house of Lehman Brothers, which spent well over $1 billion sorting out its record-destroying $613 billion in debts.

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