American Airlines and its parent company AMR filed for bankruptcy on Tuesday to cut costs and combat soaring fuel prices and dampened travel demand.
American Airlines was once the largest US carrier, but is now third behind United Airlines and Delta Air Lines. It had been the only major US 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 US 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. "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 US departures, have tumbled 45 percent since the end of September. 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 increases as it struggled to keep its planes full.
Shares of United Continental, US Airways and Delta Air Lines all rose.
AMR said last month it was also suffering from high fuel prices that sent its costs up 40 percent in the third quarter compared with a year earlier.
International Airlines Group expects its transatlantic joint venture with AMR to continue as normal during the proceedings.