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Analysis: American's Bankruptcy Could Benefit Frequent Flyers

American's Chapter 11 filing this morning is not the end of the world, or the end of American Airlines, or the end of your American AAdvantage miles.

What it is, is the end of a period of magical thinking in American's history during which the airline stubbornly refused to recognize that its costs were unsustainable, and that bankruptcy was the only reliable mechanism to set things right.

I applauded American's refusal to use Chapter 11 as a tool to force its workforce to accept lesser salaries and benefits. I thought it was the honorable thing to do. As did Gerald Arpey, American's chief.

Proving that we were both wrong, American has lost money the past three years, including a $471 million loss last year. And portending another loss for 2011, the airline has lost $982 million through the first nine months of this year.

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Meanwhile, American's primary competitors—United, Delta, and US Airways, all of which reorganized under Chapter 11 by 2005—have grown and prospered.

The numbers tell the story: American's no-bankruptcy strategy was a failure. As a result, Arpey is "retiring," and the airline will now get on, belatedly, with the business of reorganizing.

What to Expect

American assures customers that operations will continue normally.

For the most part, the company can be taken at its word. But there are at least two areas where the reorganization could have a negative impact on the traveling public.

First, there's the effect of reorganization on employee morale. American's cost-cutting will require concessions from its workers. Painful concessions. And disgruntled flight attendants, reservations agents, and check-in agents can be a drag on the travel experience, an experience that is already viewed by many as akin to a visit to the dentist.

Second, there's the possibility that flights and routes will be cut in an effort to better manage costs. In an industry where more service equates to more convenience, that would be a negative for consumers.

On a positive note, there is the possibility of a frequent flyer program upside. To counteract the sales hit from worried travelers, American may well ratchet up the AAdvantage bonuses.

Long term, I expect that American will exit bankruptcy a stronger company.

What to Do

There's ample history of major airlines surviving bankruptcy, and there's every reason to expect American to do the same. So:

  • Don't panic.
  • Don't book away from American.
  • Don't rush to redeem your frequent flyer miles.
  • Do keep an eye on American as it works through reorganization. It's not an easy process, and it could get ugly if management and labor can't find common ground.

This article originally appeared on FrequentFlier.com.

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