There was big news in the world of travel last week. American Airlines, which is currently in Chapter 11 bankruptcy, will be merging with US Airways. When the merger is completed, American Airlines will exit from bankruptcy as a new company.
American Airlines is not the first major airline to declare bankruptcy. As an example, in 2002, United Airlines filed for Chapter 11 bankruptcy. Anyone who held common stock in that company found that the stock had become worthless. I was one of the stockholders who was left with worthless stock. In May 2005, a bankruptcy judge approved a plan by management at United to terminate employee pensions, which was the largest corporate pension default in American history. In 2006, when United Airlines exited from Chapter 11 bankruptcy, the CEO of United Airlines parent company, UAL Corporation, received compensation in the amount of $39.7 million that year. At the same time, 120,000 employees had lost their pensions. 1
The saying that history repeats itself is alive and well in the second decade of the 21st century. With the approval of the $11 billion merger between American Airlines and US Airways, a similar scenario with regard to executive compensation is emerging as American Airlines prepares to exit from its term in bankruptcy.
The CEO of AMR Corporation, the parent company of American Airlines, is a man by the name of Tom Horton. Mr. Horton has worked at American since 1985, except for a few years when he worked for AT&T. In November 2011, the day before American Airlines filed for bankruptcy, Mr. Horton returned to American as CEO. When the American Airlines and US Airways merger is completed, the resulting company will be the new American Airlines. The CEO of this new company will be the CEO of the soon-to-be former US Airways.
Mr. Horton will be getting a severance package, which the company has termed as “reasonable and appropriate.” The value of this severance package is nearly $20 million. The package includes $9.94 million in cash and an equal amount of stock in the new company. For the next 2 years, Horton will have his own office and staff, at company expense. And if Mr. Horton likes to travel, he can probably increase the $20 million figure. Mr. Horton will get free flights and travel benefits for the rest of his life. 2 It’s a pretty sweet deal if you ask me.
I’m not opposed to people making a living for doing a good day’s work. However, the fact that airlines are charging all sorts of add-on fees because they say they’re having a hard time making a profit brings a question to mind. If they’re having such a hard time making a profit, where is the money coming from for such a generous severance package? In addition to whatever salary Mr. Horton has been collecting as CEO of AMR Corporation, I don’t consider a severance package worth $20 million to be reasonable or appropriate for anyone working for a company that is supposed to be just getting by.
Imagine what the world would be like if executives were paid a wage that didn’t make them fabulously wealthy. In such a world, I imagine that companies would not be going bankrupt as easily and employees would not find themselves with the short end of the stick so often. As long as companies are free to do whatever they want with the money they take in, history is doomed to keep repeating itself.
UPDATE 02/25/2013: There was an article on Forbes today about how airline companies are not very profitable. The article was entitled Airlines, Not Yet Where They Want To Be, Make 21 Cents Per Passenger. According to this article, the airline industry combined had revenue in 2012 of $142.4 billion. They realized only $152 million profit. American Airlines reported a net loss of $1.9 billion including reorganization costs and special items. I think it’s logical to assume some of the special items include the millions of dollars that are siphoned off by executives. What is wrong with this picture?
1. EXECUTIVE COMPENSATION IN CHAPTER 11 BANKRUPTCY CASES: HOW MUCH IS TOO MUCH?
HEARING BEFORE THE SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW OF THE COMMITTEE ON THE JUDICIARY, HOUSE OF REPRESENTATIVES