For American, a blemish on a distinguished history

American Airlines used to bill itself as "something special in the air," and it was.

It was the first airline to offer curbside check-in. The first with computerized reservations. It invented the frequent-flier program and came up with the deeply discounted Super Saver fare to fill empty seats on its planes.

But it was disastrously behind on one thing — recognizing that its finances were unsustainable.

In the past decade, other airlines cut expenses in bankruptcy reorganizations. American plodded along with high labor costs and aging, gas-guzzling jets. Other airlines found merger partners. American was the awkward kid at the middle school dance.

American was left with little spare cash to make improvements or take risks. The money ran out, and on Tuesday, the time did, too. American filed for Chapter 11 bankruptcy reorganization.

"They were the most innovative airline for years. Nobody could touch them," says George Hobica, who runs Airfare Watchdog, a site that alerts fliers to discount fares. "They're a shadow of their former self."

Some of American's 78,000 workers will almost certainly lose their jobs or have their pay or pensions cut. Its creditors will lose money. And its stockholders will be wiped out. The stock, which traded above $40 in 2007, closed Tuesday at 33 cents.

The bankruptcy filing is a black mark for American, which traces its routes to carrying mail for the government in the 1920s and was, in the decades between, a pioneer in the nation's skies.

"American Airlines is a link to the way travel used to be," says Edward Pizzarello, 37, an executive with a private equity firm who has more than 500,000 lifetime miles with the airline. "It reminds me of a time when people got dressed up in their Sunday best to hop on a plane and fly around the world."

In 1936, American was the first airline to fly the Douglas DC-3, the first plane designed to carry enough passengers — it seated 21 — to be profitable without making money from mail or cargo.

Mail was no longer the priority. Passengers were. In 1942, American started a catering business, Sky Chefs, to provide meals to its customers.

After World War II, Pan Am and TWA dominated international routes, while American and United focused on the domestic skies. In 1948, American rolled out coach seats and family fare plans to make flying economical.

Nine years later came the American Airlines Stewardess College, the world's first facility dedicated to flight attendant training. Two years later, American became the first airline to offer nonstop, coast-to-coast jet service with the Boeing 707. Flying time: Five hours, about the same as today.

But it wasn't until the 1970s that American — and its iconic silver jets — really started to shine.

American introduced routes to the Caribbean and expanded its sophisticated computer reservation system to travel agents. The system, known as Sabre, later became the guts for Travelocity and remains in wide use. Today, 300 million passengers a year use it to browse itineraries and make air, hotel and car reservations.

Passengers in the '70s were lured by ads promoting "the luxury fleet" and promising them "the best of everything." They also got cheap fares. Super Saver fares made American the first to figure out how to fill empty seats. They also led to the divide between business fares and cheaper, book-in-advance leisure fares that exists to this day.

In 1978, the government deregulated the airline industry, leaving the airlines to set their own routes and prices. American's leaders knew what it would mean for business.

American responded by developing the cost-efficient hub-and-spoke system we know today. Millions of passengers were suddenly changing planes in Dallas or Chicago to get to their destination.

"There was a culture of perfection, high-quality standards and innovation," says Thomas J. Kiernan, who spent 33 years at American before leaving in 2000 as senior vice president for human relations. "That's what American excelled at."

To reward loyalty and keep customers from straying to new competitors like Southwest, American launched the AAdvantage program in 1981 — the industry's first mileage rewards.

That kind of promotion was a hallmark of the CEO at the time, Robert L. Crandall. Deregulation required more clever marketing by the airline industry, which had had little need for it before.

F. Robert van der Linden, a curator at the National Air and Space Museum, says American was "among the first to understand the brave new world" after deregulation.

Crandall found creative ways to cut costs, too. He is known for a decision in 1987 to remove one olive from each salad. The reasoning: Passengers wouldn't notice, and the airline would save at least $40,000 a year.

Crandall also preserved the company's distinctive look. The planes were polished but not painted. "No paint means less weight," the CEO once explained. The unpainted look, he said, keeps "the sun glinting off our 'silver birds.'"

As other airlines failed in the 1980s and 1990s, American grew. It took over Eastern's Latin America routes and built up a hub in Miami. The demise of Pan Am and TWA left American and United as de facto national airlines, carrying the flag for the U.S. in the sky.

That prominence was perverted on Sept. 11, 2001. It was an American Airlines jet, an unpainted Boeing 767 with red, white and blue stripes down the side, that sliced into the north tower of the World Trade Center.

The jet that hit the Pentagon was American's, too, Flight 77. The second plane to hit the trade center and the aircraft that crashed in Pennsylvania belonged to United, which filed for bankruptcy in 2002.

Delta, Northwest and US Airways all headed to bankruptcy court, too, in the years following the attacks. Out of pride or a sense of responsibility, American held off. The competition slashed salaries, shrank pensions and got its loans refinanced. Delta merged with Northwest. United joined with Continental. Both surpassed American in size.

American's workers made concessions, but it wasn't enough. The airline, now in third place, was unable to merge with US Airways or anyone else.

In the past few months, American announced ambitious plans to replace its fleet with fuel-efficient planes. But those jets will take years to arrive. The airline was burning through cash in the meantime and couldn't reach an agreement with its pilots union.

By Tuesday, when it filed Chapter 11 papers with a New York federal bankruptcy court, AMR Corp., American's parent company, had $29.6 billion in debt and only $24.7 billion in assets.

Thomas W. Horton, who will replace Gerard Arpey as CEO, said American will probably cut flights "modestly" while it reorganizes. The frequent-flier program, American promises, will be untouched. Many experts predict American will emerge stronger, though it is too early to say when and how.

"They're still a major player, and I think they always will be," van der Linden says. "I don't think they're going anywhere."

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Scott Mayerowitz can be reached at http://twitter.com/GlobeTrotScott.

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American Airlines files for bankruptcy

(Reuters) - American Airlines filed for bankruptcy protection on Tuesday to cut labor costs in the face of high fuel prices and dampened travel demand, capping a prolonged descent for what was once the largest U.S. carrier.

AMR Corp, the parent of American Airlines, also filed for bankruptcy and replaced its chief executive.

The company, which employs about 88,000, has been mired for years in fruitless union negotiations, complaining that it shoulders higher labor costs than rival domestic and foreign carriers that have already restructured in bankruptcy.

United Continental Holdings Inc's United Airlines and Delta Air Lines Inc, both of which used Chapter 11 to cut costs and later found merger partners, are now the largest U.S. carriers. American ranks third.

"The world changed around us," incoming Chief Executive Tom Horton told reporters on a conference call. "It became increasingly clear that the cost gap between us and our competitors was untenable."

AMR named Horton as chairman and chief executive, replacing Gerard Arpey, who retired.

American plans to operate normally while in bankruptcy, but the Chapter 11 filing could punch a hole in the pensions of roughly 130,000 workers and retirees.

AMR pension plans are $10 billion short of what the carrier owes, and any default could be the largest in U.S. history, government pension insurers estimated.

Ray Neidl, aerospace analyst at Maxim Group, said a lack of progress in contract talks with pilots tipped the carrier into Chapter 11, though it has enough cash to operate. The carrier's passenger planes average 3,000 daily U.S. departures.

"They were proactive," Neidl said. "They should have adequate cash reserves to get through this."

PROBLEMS TO ADDRESS

Bankruptcy gives AMR a chance to pare less profitable operations, and could result in the sale of flight routes. The process also gives AMR more flexibility, according to Jack Williams, a professor of law at Georgia State University.

"There are considerable tax benefits that they will be able to use in a bankruptcy case, and they will be able to more aggressively manage their liabilities," Williams said.

But analysts question whether the bankruptcy will address operational shortcomings that have eroded revenue.

"Bankruptcy is not necessarily the be-all, end-all," said Helane Becker, an analyst with Dahlman Rose & Co. "They've got more problems to address in addition to the cost problem."

Shares of AMR closed Tuesday down $1.36, or 84 percent, at 26 cents, down from a 52-week high of $8.89 on January 7. Stock typically is wiped out in bankruptcy.

Shares of rival airlines rallied on expectations that reduced competition could boost fares. AMR had kept a lid on industrywide fares in its effort to keep its airplanes full.

United Continental shares closed up 6.3 percent at $17.63, Delta rose 5 percent to $7.80 and US Airways Group Inc climbed 4.4 percent to $4.46.

AMR shares were halted 28 times on the NYSE on Tuesday for triggering a circuit breaker rule, activated when a stock moves up or down at least 10 percent within five minutes.

SLIMMED-DOWN AMR

In its bankruptcy petition filed in Manhattan, AMR reported assets of $24.72 billion and liabilities of $29.55 billion. The company has $4.1 billion in cash.

One bankruptcy rule is "don't wait too long," Harvey Miller, a partner at Weil, Gotshal & Manges representing AMR, said at a court hearing. "Don't wait until the course is irreversible. That is what American Airlines is doing today."

AMR's bankruptcy filing showed few details about how the company would proceed, said Stephen Selbst, a bankruptcy attorney with Herrick Feinstein in New York.

"It's possible they are still in negotiations and don't want to put something on paper that might prejudice those negotiations," he said.

Experts believe AMR stands to save billions by restructuring its obligations in bankruptcy.

"AMR will no longer have its defined benefit pension plan, helping absorb nearly $7 billion in debt," Morningstar equity analyst Basili Alukos said.

"I imagine the company can save between $1.2 billion to $1.5 billion in labor costs, in addition to savings on repair and maintenance and better fuel burn," he said.

MERGER IN THE OFFING?

AMR said the bankruptcy has no direct legal impact on non-U.S. operations. It also said it was not considering debtor-in-possession financing.

But it could susceptible to unsolicited takeover bids from rival carriers. AMR has long said it could thrive on its own.

Robert Herbst, an analyst with AirlineFinancials.com and a former American pilot, said there was a "95 percent" chance American would join up with another carrier within two years.

"US Airways is probably toward the top of the list but it wouldn't be the only (potential merger partner)," he said.

A US Airways representative did not immediately return a phone call seeking comment.

Most large U.S. carriers are the products of mergers.

United Continental combined the former United Airlines and Continental Airlines, while Delta bought the former Northwest Airlines. US Airways was formed from a 2005 merger with America West Airlines.

US Airways and United Airlines filed for bankruptcy protection in 2002, and Delta and Northwest in 2005. US Airways had tried to buy Delta out of bankruptcy.

Japan Airlines Co, one of American Airlines' alliance partners, filed for bankruptcy last year.

American Airlines said it would remain an active member of the oneworld global airline alliance.

LABOR PAIN

American struggled with labor costs despite massive concessions from unionized workers in 2003, which enabled it to avoid Chapter 11 at the time.

"That deal wasn't good enough," former American chief Robert Crandall told Reuters. "The other airlines that went bankrupt cut their costs much deeper than American.

"If you look at all of the elements of the problem, they all stem back to costs," he said. "It hasn't cut capacity effectively given the constraints" that labor placed.

Contract talks with pilots hit a wall in recent weeks over wages, benefits and work rules. Talks with unionized flight attendants have also flagged.

"While today's news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way," David Bates, president of the Allied Pilots Association, said in a statement.

A wave of pilot retirements this year prompted speculation of a Chapter 11 filing, given that the retirements could preserve pensions that might be at risk of being terminated.

"The 18-month timeline allotted for restructuring will almost certainly involve significant changes to the airline's business plan and to our contract," Bates said.

The case is In re: AMR Corp, U.S. Bankruptcy Court, Southern District Of New York, No. 11-15463.

(Reporting by Kyle Peterson in Chicago; Matt Daily, Nick Brown, Caroline Humer, Chuck Mikolajczak and Jonathan Stempel in New York; Tom Hals in Wilmington, Delaware; Karen Jacobs in Atlanta; John Crawley in Washington; John D. Stoll in Detroit; and Tanya Agrawal in Bangalore; Editing by Gopakumar Warrier, Maureen Bavdek, John Wallace, Derek Caney and Carol Bishopric)

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