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AMR Said to Have Begun Bankruptcy Contingency Plans in August

American Airlines executives began considering a bankruptcy filing in August and were joined by parent AMR Corp.’s board in October as the carrier prepared a 2012 business plan, people familiar with the matter said.

AMR advisers at law firm Weil Gotshal & Manges LLP and investment bank Rothschild Inc. were asked 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, who weren’t authorized to comment publicly.

As American and its board weighed options, financial pressure built with the uneven economic recovery, volatile fuel prices and the stalled labor talks. The board began to more seriously consider a filing in the last few weeks. They met in New York yesterday and later voted by conference call to approve the filing, new Chief Executive Officer Tom Horton said today.

“This is the right action for the company at the right time,” Horton said on a conference call with reporters. “The board has given great consideration to the best path forward for many, many months. A final decision was reached last night.”

The board vote was unanimous and included the support of Chairman and CEO Gerard Arpey, Horton said. Arpey, 53, had struggled for years to keep American out of Chapter 11 and retired after yesterday’s vote.

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. Free cash flow in the 12 months ended Sept. 30 fell to negative $1.3 billion, according to data compiled by Bloomberg.

Labor-Cost Gap

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. shed when they filed bankruptcy earlier in the last decade.

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.

“It was a variety of factors,” said Horton, 50. “We have said with increasing urgency in recent weeks that we needed to address that cost gap. At the same time, we don’t live in a vacuum. There were a lot of things going on around us, including global economic turmoil and volatile oil prices.”

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.

Preserving Value

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.

American executives also became more concerned about facing a greater-than-projected cash burn 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 debt and financing markets, leading airline executives to later tell the board they had no confidence they could tap debt markets in the next few months to refinance maturing obligations.

A Nov. 17 Standard & Poor’s debt-rating cut by one step to CCC+ also weighed in the board’s decision, Horton said.

The Final Decision

Arpey became CEO in 2003 when predecessor Donald Carty stepped aside when 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.

During the Nov. 28 board meeting, Arpey, long a champion of avoiding the bankruptcy path his rivals had taken, told the board he felt he had lost some credibility and it made sense to have another executive run AMR after a filing, one person said.

David Bates, president of the Allied Pilots Association, received a call from Horton at 5 a.m.

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 today 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.”

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