Today we found out that AMR Corporation, the parent company of both American Airlines and American Eagle filed for Chapter 11 Bankruptcy protection. For those who have flights booked through American Airlines for your next vacation, you may be wondering what happens now and how does this affect you.
Chapter 11 is the reorganization section of the Bankruptcy Code. This means that the airline may get a break from creditors while they develop a plan for how to pay back their debts. Under Chapter 11, the business continues to operate, many times with little impact to you.
During the reorganization, the company will work on extensions of loans, cancellation of some debts, voiding contracts and setting priorities for payments, etc. The business may continue to operate but if the court find any fraudulent activity or misconduct, the court could appoint an investigator and possible a Trustee to run the business.
Chapter 11 is different from Chapter 7 whereas in the latter, the assets of the company are collected and sold with the proceeds going to the creditors. This usually doesn’t happen until the business is no longer operating or if the court determines that the business cannot successfully recover from Chapter 11 reorganization.
There are a couple ways to protect yourself in the event of an airline (or cruise line, etc.) files for bankruptcy protection. Make sure you always use a major credit card to purchase travel. You should also obtain travel insurance that includes supplier default.
As for American Airlines, they have stated that they will continue to fly normal schedules, honor tickets and reservations, maintain AAdvantage (the frequent flyer program), extend Admiral Club benefits and continue paying employee wages and benefits.
Other major airlines have already gone through bankruptcy, including US Airways, United, Delta and Northwest. American Airlines is the last of the major carriers to file for bankruptcy. Hopefully, the restructuring will go smoothly and we won’t experience any difficulties at the consumer level, but prepare yourself nonetheless.