AMR Can Reject Some Engine, Aircraft Leases, Bankruptcy Court Judge Rules

AMR Corp. (AMR), the bankrupt parent of American Airlines, won permission to pursue a deal to buy 32 planes from Boeing Co. (BA) through 2012 and to reject leases on some aircraft as it reorganizes with a more competitive fleet.

U.S. Bankruptcy Judge Sean Lane in Manhattan today approved the requests by the third-largest U.S. airline company. Boeing was scheduled to deliver two 737-800 planes by now, and deliveries to Fort Worth, Texas-based AMR will resume on Jan. 10, according to court papers.

“AMR desires to move forward expeditiously, and hopes that other parties in interest share that desire and make AMR a competitive vibrant airline leader for the benefit of all of its economic stakeholders,” Harvey Miller, the company’s lead bankruptcy lawyer, said in an e-mail after the court hearing.

The rejection of leases on unwanted planes and the purchase of new ones are part of AMR’s effort to catch up with rivals. AMR built a “war chest” of about $4.8 billion in cash and investments in preparation for the bankruptcy, a lawyer for the U.S. Trustee, which oversees bankruptcies, said at the hearing.

Once the world’s largest airline, AMR filed for bankruptcy on Nov. 29 listing debt of almost $30 billion. The airline, which was headed for a fourth straight yearly loss, has said its annual labor costs put it at an $800 million disadvantage, compared with peers in the business.

AMR has a longer term deal to buy as many as 200 planes from Boeing, including the 32 it asked for today.

Equity Committee

Lane said today that he received a letter asking him to form an equity committee for AMR shareholders, which he passed on to the U.S. Trustee’s office for consideration.

Miller said American’s bookings are “high” during the holidays and the bankruptcy hasn’t had a material effect on business. Miller complained to Lane that the AMR creditors’ committee “bushwhacked” the company by claiming a victory in making it restrain spending. He referred to a table of pre- filing expenses that contained a typographical error as “inflammatory.”

According to the creditors’ data, AMR was seeking to pay $937.7 billion in pre-bankruptcy expenses. That figure should have read $937.7 million. AMR has another $335.5 million of back wages and employee expenses to pay, according to the creditors.

AMR can continue hedging its jet fuel costs through Morgan Stanley (MS), Lane said. According to an order he signed after the hearing, bankruptcy rules will be lifted to allow AMR to make payments and grant security to the investment bank. Morgan Stanley will have a first priority lien on AMR’s collateral, according to the order. Creditors have asked AMR to let them know if hedging exceeds 60 percent of fuel consumption.

Lane approved AMR’s request to end lease contracts after AMR changed its plan to resolve objections by City National Bank, U.S. Bank National Association and AWAS Aviation Services Inc.

‘Languishing’ Equipment

AMR didn’t say at the hearing how much money was involved, though in filings it has said the aircraft and engines “have little if any marketable value and are no longer necessary.” Most of its excess leased equipment has been taken out of service and is “languishing in expensive storage space without generating any value,” it has said.

Lane deferred giving final permission for AMR to continue its current cash and investment practices, after the U.S. Trustee’s lawyer said some investments that are part of the airline company’s cash hoard don’t comply with rules. Lane said he wanted more information from AMR on the risks of its investments and how much it would cost to bring them into compliance.

Appropriate Steps

U.S. Bank, involved in contracts for 12 of the leased aircraft, objected that AMR hadn’t devised a reasonable process for giving up the airplanes, or a reasonable timeframe.

AMR’s official creditors’ committee, which includes Chicago-based Boeing, representatives from its unions and bondholders, has said it intends to work consensually with the company as it restructures.

The airline entered Chapter 11 reorganization with fewer scheduled passengers carried and a smaller fleet than either Delta-Northwest or United-Continental, according to creditors.

Unions for the carrier’s pilots, flight attendants and mechanics joined the committee after failing to reach new contract agreements with American in negotiations that began as far back as 2006. AMR singled out industry-leading labor costs as one reason for its Nov. 29 bankruptcy filing.

The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Tiffany Kary in New York at tkary@bloomberg.net.

To contact the editors responsible for this story: John Pickering at jpickering@bloomberg.net

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