American Airlines files for Chapter 11 protection

American Airlines' parent company AMR Corporation has filed for Chapter 11 bankruptcy protection.

Shares in the airline plunged immediately they resumed trading on Tuesday and closed 81% down. They are now worth 31 cents each.

The company expects the airline to continue to operate as normal throughout the bankruptcy process.

Speculation about AMR's financial position surfaced in recent weeks after cost-cutting negotiations failed.

AMR said agreements with its workforce forced it to spend $600m (£384m) more than other airlines on staff costs.

The airline employs 78,000 staff worldwide and operates out of five major US hubs.

Chapter 11 refers to a section of the US Bankruptcy Code. It protects a company from its creditors, giving it time to reorganise its debts or sell parts of the business.

American Airlines was the only one of the major US airlines operating international routes not to file for bankruptcy after the September 11th terrorist attacks.

Its competitors have successfully used bankruptcy to restructure their labour contracts and cut costs.

Changes at the board

The company also announced that Gerard Arpey, the Chief Executive of AA has retired and would be replaced by the company's president, Thomas Horton.

Mr Horton said the board had unanimously decided to file for bankruptcy on Monday night.

He announced that American would be looking to change its employees' terms and conditions. "We plan to initiate further negotiations with all of our unions to reduce our labour costs to competitive levels," he said.

David Bates, president of the Allied Pilots Association conceded that employment terms would change. "The 18-month timeline allotted for restructuring will almost certainly involve significant changes to the airline's business plan and to our contract."

Mr Horton insisted that the company would emerge in more robust health: "I am confident American will emerge even stronger as a global leader known for excellence and innovation."

He added that during the restructuring the airline would reduce its flight schedule in the US "modestly" with a corresponding reduction in staff.

Mr Horton said no single factor had led to the decision to file for Chapter 11 but the company needed to cut costs. He pointed to weak demand and high fuel prices, which have risen more than 50% in the last five years.

British Airways

British Airways operates an international partnership with AA on transatlantic routes and are both part of the One World alliance.

American also has a joint venture with Japan Airlines.

British Airways' parent company IAG said in a statement: "We have every confidence in the future of American Airlines. We are pleased they are taking this step which shows commitment and determination.

The statement added: "Our joint business, which is a revenue sharing agreement, continues to operate as usual."

Reversal of fortunes

American Airlines was the world's biggest airline three years ago but has since fallen behind Delta and United after they bought out other airlines. Delta filed for bankruptcy in 2005 and United was one of the first to do so in 2002.

Unlike other major US airlines, AA has not returned to profit in the last two years. AMR Corporation lost $162m in the third quarter of 2011 and has reported losses in 14 of the last 16 quarters.

The global economic crisis has had a huge impact on the airline industry in general. Ashley Steel, transport expert at KPMG, thinks travel companies will have to adapt as businesses and individuals cut costs and fly less. "This will create more pressure on governments and regulators to allow airlines to merge cross border," he said.