Gerard Arpey’s eight-year effort to keep AMR Corp. (AMR) out of bankruptcy ended with his retirement as a board decision to seek court protection threatened to erode his credibility, people familiar with the matter said.
In opting to leave, Arpey rebuffed the board’s request to remain chairman and chief executive officer as the parent of American Airlines reorganized in bankruptcy. Arpey, 53, told the board he could no longer lead AMR because he had fought to avoid bankruptcy for so long and the board now was choosing another path, said the people, who weren’t authorized to speak publicly.
Since taking the helm in 2003, Arpey had pushed back against suggestions that American could resolve its ills by seeking court protection to restructure its debt. The pressure increased as AMR headed to a fourth straight annual loss, unable to secure new contracts to trim industry-leading labor costs and facing dwindling cash reserves and maturing debt.
Arpey began considering options outside of American during the summer and moved closer to a decision in the past week, the people said. Fort Worth, Texas-based AMR announced the filing shortly before 7 a.m. local time yesterday. Moments later Arpey told employees in an e-mail that he would become a partner at Emerald Creek Group LLC, a private-equity firm created by Larry Kellner, a former CEO of Continental Airlines Inc.
“I concluded that my remaining in those roles would not be best for the company,” Arpey wrote. “Executing the board’s plan will require not only a reevaluation of every aspect of our business, but also the leadership of a new chairman and CEO who will bring restructuring experience and a different perspective to the process.”
‘A Different Perspective’
American executives began considering a bankruptcy filing in August and were joined by the AMR board in October, one of the people familiar with the matter said yesterday. The board began to more seriously consider a filing in the last few weeks, and voted during a Nov. 28 conference call following a New York meeting.
While Arpey declined an offer to remain CEO and chairman, he still supported the board’s decision, said Tom Horton, who was elevated from president and named to lead the company.
“Things developed fairly rapidly over the recent weeks,” Horton said on a conference call with reporters. “That’s not a decision they took lightly. There was much discussion, much debate. In the end, that was a unanimous decision.”
Arpey, through AMR, declined a request for an interview.
AMR earlier hired advisers at law firm Weil Gotshal & Manges LLP and investment bank Rothschild Inc. to review whether a filing might be needed. Directors looked for ways to further cut operating costs as AMR worked unsuccessfully in October and November to reach a new contract with pilots, said the people.
‘The Right Action’
As American and its board weighed options, financial pressure built with the uneven economic recovery, volatile fuel prices and the stalled labor talks.
“This is the right action for the company at the right time,” Horton said. “The board has given great consideration to the best path forward for many, many months.”
AMR is headed for a fourth-straight annual loss -- one that analysts forecast will top $1 billion -- while other carriers returned to profit in 2010.
The company has been negotiating since 2006 with unions in an attempt to close what it says is an $800 million labor cost disadvantage to its peers. American still pays into a defined benefit pension fund and provides retiree medical benefits, obligations that carriers such as Delta Air Lines Inc. (DAL) shed when they filed bankruptcy earlier in the last decade.
Arpey on Bankruptcy
Arpey spoke frequently about American not shirking its debts and not wiping out the value of shares held by AMR investors through a bankruptcy filing. At a June 2008 Merrill Lynch Transportation Conference, he spoke of how rivals had, through the courts, “eliminated or frozen defined benefit pension plans, eviscerated retiree medical plans, eliminated restrictive work rules, outsourced work, and cut pay to levels below American.”
Talks with the pilots stalled Nov. 14, when the Allied Pilots Association declined to send the company’s last offer to members for a vote, saying it would clearly be rejected. The action wasn’t what led to the bankruptcy decision, Horton said.
AMR shares tumbled 79 percent this year through Nov. 25 to $1.62 a share, buffeted by ongoing speculation the carrier might be forced into bankruptcy.
AMR’s board saw a filing now as the best way to preserve the company’s value and ensure a successful restructuring, one of the people said. The company could use its $4.1 billion in unrestricted cash and short-term investments to support operations in bankruptcy instead of seeking outside financing and giving up some control of its future.
Demands on Cash
American executives also became more concerned they might have to use more cash than projected early next year during the traditionally slow winter travel season, said one of the people. The final issue, said this person, was a tightening in September and October of the credit markets, leading AMR executives to later tell the board they were less confident about refinancing maturing obligations in the next few months.
A Nov. 17 Standard & Poor’s debt-rating cut by one step to CCC+ also weighed in the board’s decision, Horton said.
Arpey became CEO in 2003 when predecessor Donald Carty stepped aside after it became known that the airline arranged for managers’ retention bonuses in the event of a bankruptcy while seeking concessions from unions. With Carty gone, Arpey won all the necessary givebacks within a day.
David Bates, president of the Allied Pilots Association, received a call from Horton at 5 a.m. yesterday informing him of the bankruptcy decision.
Laura Glading, president of the Association of Professional Flight Attendants, was aware of “strong rumors” the evening of Nov. 28 that a filing might be coming. She also received an early morning call from Horton relaying the decision.
“I reminded him of the importance of the employees in turning this thing around,” Glading said in an interview. “We pledged to work together.”
To contact the reporters on this story: Mary Schlangenstein in Dallas at email@example.com; Jeffrey McCracken in New York at firstname.lastname@example.org