A bankruptcy hurts everyone. It besmirches the reputation of the CEO. It destroys stockholders’s faith in the company. It threatens the livelihood of employees. It disrupts the lives of customers, and it is a harbinger for hassles that children of the future will face. So how could a company that was the first to offer curbside check-in, the frequent flyer program, computerized reservations, and the supersaver fare, see its $41 peak share price in January of 2007 fall to 39 cents share today?
The simplistic answer is that debt caused American Airlines’ bankruptcy. A universally accepted definitive answer will never be agreed upon, but a few factors need to be admitted reluctantly as evidence to examine: fuel cost, labor costs, governmental deregulation, 9/11, and a cracked crystal ball.
But what about competition? Did other airlines providing a superior product or price give American a run for its money? Did giving each passenger access to Direct TV on Frontier Airlines flights contribute to American Airline’s financial hardship? It’s hard to say how much of a factor competition was.
Papers filed in a bankruptcy court in New York revealed that the AMR Corporation, the parent company of American airlines, had $24.7 billion in assets and $29.6 billion in debt. AMR was unable to reduce labor costs by obtaining new contracts with the unions. AMR claims it spends $600 million more than other airlines because of labor-contract rules. The cost of pensions has had an impact on American Airlines’ profit. A credit downgrade has increased the cost of borrowing money. In the past five years, the cost of jet fuel has risen by more than 60 percent.
Both economic and common sense declare that the cost of baking and distributing bread has to increase over time if the economy is growing. The same economic and common sense declares that the cost of collecting and distributing people should have a corresponding upward direction. It is true, technology and other factors bind together to bring down cost, but at some point the economic law of diminished returns will impact services, just as it does production.