War deepens airline's crisis

FORT WORTH - American Airlines, the world's biggest carrier, may seek bankruptcy protection next week in part because of the war in Iraq, sources said yesterday.

American, owned by AMR Corp, would be the fourth major US airline to file for Chapter 11 protection in the past year, following US Airways Group, UAL Corp's United Airlines and Hawaiian Airlines.

The carriers have been hurt by an economic downturn, a travel slump caused by the September 11 terrorist attacks and now the war in Iraq.

American Airlines has failed to cut costs fast enough to match a drop in revenue that never fully recovered from the September 11 attacks in 2001 and was exacerbated by the start of fighting in Iraq, which reduced air traffic 10 per cent last week.

Bankruptcy would allow the Texas-based airline to restructure more than US$27 billion ($49 billion) in debt and stem losses that have totalled US$5.27 billion in the past two years.

Sources said AMR was negotiating terms of about US$1.5 billion in bankruptcy financing from Citigroup and other lenders to help finance operations while it reorganised under court supervision.

"There has been rampant speculation on this issue for many weeks," said American spokesman Bruce Hicks. "Our focus is to do everything possible to avoid bankruptcy because we all believe it is in the best interest of our employees to do so."

The timing of the Iraqi war may have ended American's hopes of avoiding bankruptcy by securing US$1.8 billion in concessions from workers.

The airline has been in daily talks with unions, and yesterday reached agreement with fleet service workers, one of eight employee groups represented by the Transport Workers Union.

"Had the industry been stronger and American been stronger, they might have been able to say, 'We can wait this out'," Dan Kasper, an airline industry economist with LECG, said.

"But in the weakened condition they are in, they don't have much leeway."

A bankruptcy filing by American was likely to occur in Fort Worth closer to April 7, sources said.



Sean Egan, of Egan-Jones Ratings, said American would follow a similar pattern to US Air and United: win labour cuts, negotiate financing with lenders, and then file for bankruptcy.

Losses at American totalled an industry record US$3.5 billion last year as people travelled less and airlines trimmed fares to 15-year lows.

American said it needed to reduce operating costs by about US$4 billion a year to avoid bankruptcy and compete with profitable low-cost rivals.

Kasper said the airline was more active in international markets than some other carriers and might see a greater traffic decline.

American is cutting international capacity 6 per cent.

United, the world's second-largest carrier, and leaders of its pilots union yesterday reached agreement on US$1.1 billion in pay cuts in the first contract to be negotiated since the airline filed for bankruptcy in December.

United wants to reduce its wages bill by US$2.6 billion and still is negotiating with other unions.

American has joined other carriers in lobbying Congress for US$4 billion in tax, security and insurance aid to offset expected war-related losses. An aid proposal could be added next week to President George W. Bush's US$74.7 billion proposal to fund the war.