American Airlines and its parent company AMR Corp filed for bankruptcy on Tuesday to cut costs and combat soaring fuel prices and dampened travel demand.

American Airlines was once the largest U.S. carrier, but is now third behind United Airlines and Delta Air Lines . It had been the only major U.S. airline to avoid a bankruptcy filing in the last decade and consequently has the industry's highest labour costs.

The airline hopes bankruptcy will cut labour costs after it failed to reach a deal with pilots and other work groups after years of fruitless negotiations. Analysts question, however, whether restructuring under Chapter 11 of U.S. Bankruptcy Code will address operational shortcomings and bolster revenue.

The filing also leaves AMR vulnerable to unsolicited takeover bids by rival airlines in the rapidly shrinking airline industry.

It completes the cycle, said Helane Becker, an analyst with Dahlman Rose & Co. Every major airline in the United States has filed for Chapter 11.

AMR's move comes on concerns of weaker travel demand, leading airlines to cut back service.

In its bankruptcy filing, AMR said its cost-cutting in recent years had been insufficient and that it could not continue without changing its uncompetitive cost structure.

Without addressing the realities of the marketplace, AMR cannot be competitive with its peers, it said.

Shares of AMR, whose passenger planes average 3,000 daily U.S. departures, have tumbled 45 percent since the end of September.

Shares of AMR tumbled $1.39 in early trading to 23 cents on the New York Stock Exchange. Stock in bankrupt companies typically is wiped out when a company exits Chapter 11 and new shares are issued, making the old shares worthless.

Last week the AMR shares hit their lowest level since 2003, when AMR skirted bankruptcy by winning wage concessions from its unions.

Shares of rival airlines rallied in early trade on expectations that fares industry wide could rally if American Airlines sheds some of its cost burdens. Experts said the carrier has kept fares low and spoiled industry-wide fare hikes as it struggled to keep its airplanes full.

Shares of United Continental were up 7.7 percent at $17.86 on the New York Stock Exchange. Shares of US Airways Group were up 10 percent at $4.70 on NYSE. Shares of Delta Air Lines rose 4.44 percent to $7.76 on NYSE.

AMR said last month it was also suffering from soaring fuel prices that sent its costs up 40 percent in the third quarter compared with a year earlier.

International Airlines Group expects its trans-atlantic joint venture with AMR to continue as normal during the proceedings.


AMR named Thomas Horton as chairman and chief executive on Tuesday, replacing Gerard Arpey, who retired.

Under its Chapter 11 bankruptcy filing in a New York court, the company listed assets of $24.72 billion (15.82 billion pounds) and liabilities of $29.55 billion. The company has $4.1 billion in cash.

AMR said both American Airlines and its regional carrier American Eagle were expected to fly normal schedules throughout the Chapter 11 process.

We plan to initiate further negotiations with all of our unions to reduce our labour costs to competitive levels, Horton said.

The union representing AMR's pilots called the bankruptcy filing a solemn occasion.

While today's news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way, David Bates, president of the Allied Pilots Association, said in a statement.

The 18-month timeline allotted for restructuring will almost certainly involve significant changes to the airline's business plan and to our contract, he said.

The bankruptcy proceedings will give AMR more tools in its long-running effort to restructure its operations and balance sheet, according to Jack Williams, professor of law at Georgia State University.

There are considerable tax benefits that they will be able to use in a bankruptcy case and they will be able to more aggressively manage their liabilities.

Bankruptcy also allows the company to force creditors to agree on a plan to reorganize the company, and it also gives AMR the chance to sell flight routes through the bankruptcy sales process.

But Tuesday's filing with AMR showed few details about how the company would proceed, said Stephen Selbst, a bankruptcy attorney with Herrick, Feinstein LLP in New York.

What it suggests is they haven't settled on a strategy or they would have been more up front. It's possible they are still in negotiations and don't want to put something on paper that might prejudice those negotiations, he said.

Still, Dahlman's Becker said the bankruptcy proceedings would not solve AMR's problems and that the airline needed to rework its operations and boost revenue.

Bankruptcy is not necessarily the be-all, end-all, she said. They've got more problems to address in addition to the cost problem.

AMR's top rivals, UAL Corp and Delta Air Lines, used bankruptcy protection to slash costs and have since bought out other airlines: Delta bought Northwest Airlines and UAL bought Continental Airlines to form United Continental Holdings.

US Airways and United Airlines sough relief under Chapter 11 bankruptcy in 2002. Delta and Northwest filed in September 2005.

AMR has been in labour talks with its pilots for five years, and a wave of pilot retirements in October prompted speculation the airline was nearing a bankruptcy filing.

Some industry watchers believed the pilots chose to retire to lock in pension values that may be in jeopardy as the company moves through bankruptcy court.

AMR said the bankruptcy has no direct legal impact on operations outside the United States. It also said it was not considering debtor-in-possession financing.

In addition to its passenger service, AMR carriers provide over 90 million pounds of weekly cargo lift around the globe.

AMR said Weil, Gotshal & Manges LLP is lead counsel on the bankruptcy case.

The case is in Re: AMR Corp, Southern District Of New York; No:11-15463.

(Reporting by Tanya Agrawal in Bangalore, Caroline Humer in New York, Tom Hals in Wilmington and Kyle Peterson in Chicago, Karen Jacobs in Atlanta and John Crawley in Washington DC; Writing by Matt Daily; Editing by Gopakumar Warrier, Maureen Bavdek, John Wallace and Derek Caney)

(This story was corrected to change the share drop in paragraph 10 to $1.39 from 1.39 percent)