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Airports Don't Panic

CHICAGO — As market participants digested the news of American Airlines' Chapter 11 federal bankruptcy filing Tuesday, airports stressed their ability to withstand any potential impact while tax-exempt investors reached out to bankruptcy attorneys to gauge the strength of their holdings.

The airline — a subsidiary of AMR Corp. based in Fort Worth, Texas — reported guarantees covering at least $1.5 billion of outstanding bonds with total payments upon maturity reaching $3.2 billion at the close of 2010, American's financial filings say.

Distressed debt holders compiled a listing of municipal debt with some form of backing from American totaling more than $2.9 billion, with a range of securities from bonds that fall into the category of unsecured to others backed by leasehold mortgages.

The list included issues for American's terminal at the John F. Kennedy International Airport issued through the Port Authority of New York and New Jersey, Chicago's O'Hare International Airport, Dallas-Fort Worth International Airport, Los Angeles International Airport, San Juan International Airport, and a maintenance base in Tulsa, Okla.

American's unsecured bonds were trading as low as 16 cents on the dollar Tuesday while its JFK bonds that are considered secured traded at between 75 cents and 77 cents, according to Interactive Data Pricing and Reference Data Inc.

The structure and security of the deals run the gamut. Investors demanded stronger securities — especially ones that could potentially withstand bankruptcy filings — following United Airlines' 2002 bankruptcy, during which it successfully challenged repayment of a chunk of its special facilities revenue bonds investors had considered secured debt.

However, bankruptcy filings can throw a wrench in even the sturdier structures where bondholders believe they have a solid backing. "A pledge may not be quite as good as you think. Bankruptcy is the acid test," said one bankruptcy attorney who represented bondholders in past filings by United, Delta Air Lines and the former Northwest Airlines.

In the case of a sturdier leasehold mortgage pledge with trustee powers to recoup funds from the re-letting of gates, bondholders can still be at risk should the airline reject the lease and an airport is unable to re-let the facilities. The terms of the lease could also be legally challenged. Recovery rates for bondholders in past airline bankruptcies have ranged from pennies on the dollar for unsecured bonds to full repayment in cases where pledges have overcome challenges.

The fate for some bondholders depends on American's goals in the restructuring. "Is American simply trying to renegotiate labor contracts and shed some debt, or are they going to go through every element of their debt and cross-default features in an attempt to challenge most debt?" the bankruptcy attorney said.

American said in a statement that it filed to reduce labor costs and its debt load. It's the last major airline to seek to restructure its business. It avoided bankruptcy in the last decade, unlike its major competitors. United filed in 2002 and Delta and Northwest in 2005. Their lower cost structure hurt American's competitive edge and ability to earn a profit.

The company posted three consecutive years of losses, including $471 million last year. At the end of September, it reported $24.7 billion in assets and $29.6 billion in debt. It has about $4.1 billion in cash and short-term investments on hand to keep operating and does not expect to seek debtor-in-possession financing.

"Our board decided that it was necessary to take this step now to restore the company's profitability, operating flexibility and financial strength," the airline's newly named chairman and chief executive officer, Thomas W. Horton, said in a statement. Horton, formerly the company's president, replaces retiring CEO Gerald Arpey.

The airline said it would continue operating as normal as it proceeds through the reorganization process and that it does not intend to adjust its flight schedule. The bankruptcy filing gives the carrier the edge in labor talks and it plans to reduce its fuel bills by introducing new, more efficient aircraft.

Airline sector analysts said they didn't expect any near-term disruptions to the sector. "The bankruptcy is clearly something we will monitor and have dialogues with the airports impacted, but from our perspective these events are not unexpected. There's been a history of airline bankruptcies and we have to wait and see if there is an impact," said Standard & Poor's analyst Todd Spense.

Airports where the airline has a significant presence face fewer operating risks given their importance to American's network, whereas smaller airports are at greater risk of losing service, analysts said.

Some bankruptcy code changes have taken effect since previous airline bankruptcies, with the most significant being an 18-month limit on the exclusive period during which companies have to file a reorganization plan. In the past, companies could request lengthy extensions as United did.

American operates hubs at LAX, JFK, DFW, O'Hare and Miami International Airports, with a significant presence at more than a dozen airports. "We intend to maintain a strong presence in domestic and international markets, including our cornerstones in Dallas-Fort Worth, Chicago, New York, Miami and Los Angeles. As we and all airlines routinely do, we will continue to evaluate our operations and service, assuring that our network is as efficient and productive as possible," Horton said.

The bankruptcy filing comes as Dallas-Fort Worth International Airport is embarking on a $3.1 billion capital improvement program that includes remodeling of its four original terminals through bonds backed by airport revenues.

DFW is American's largest hub and is near the airline's headquarters southwest of the airport. American accounts for 84% of enplanements with more than 700 daily departures. Officials said they are confident operations will continue as normal for the time being.

In Miami, the airline and its affiliates account for 70% of passengers. American Airlines was the largest source of revenue for MIA in fiscal 2010, paying $231.7 million.

American accounts for 30% of passenger traffic at O'Hare in Chicago. "The city anticipates minimal immediate or long-term negative impacts as a result," said Aviation Department Commissioner Rosemarie Andolino. American has signed off on the next round of projects that are part of an $8 billion expansion but will need airline support for future plans.

American has held the top market share at LAX for the past two years. The airline's market share from January through October 2011 is 14.5% representing 7.35 million passengers. The market share in 2010 was 14.4%. Airport spokeswoman Nancy Castles said no flight changes are expected through the holidays, but then most airlines traditionally announce schedule changes to adjust to the post holiday drop in passengers.

The company filed Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York. AMR's lead counsel is Weil, Gotshal & Manges LLP and its financial advisor is Rothschild Inc. The airline and its affiliates serve 260 airports in more than 50 countries and territories with, on average, more than 3,300 daily flights.

Rich Saskal, Randall Jensen, Shelly Sigo, Jim Watts, Keeley Webster, Richard Williamson contributed to this story.

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