A US airline declaring bankruptcy is not uncommon. Indeed, it has been depressingly regular over the past 20 years. However, the American Airlines (AA) bankruptcy has an unusual angle – the CEO has fallen on his sword and resigned without any golden parachute payouts.
An explanation is here. Apparently the CEO, Gerard Arpey, had an old fashioned view that using bankruptcy to renegotiate with bond holders and employees is not an appropriate business tactic. As the article puts it he believed bankruptcy was morally wrong.
This raises an interesting question. If Mr Arpey’s beliefs were well known, did this have a beneficial effect on AA’s performance leading up to bankruptcy?
If AA’s probability of bankruptcy was reduced because of its CEO’s strongly held views then this should have been reflected in the bond rates and employee conditions. Debt holders should have been willing to accept a lower return on AA relative to other airlines because, under Mr Arpey’s leadership, bankruptcy risk was reduced. Employees should have been willing to negotiate with a longer term focus knowing that bankruptcy and renegotiation was less likely with Mr Arpey at the helm (and assuming that labor markets are not ‘perfect’ but involve switching costs or other transactions costs).
So AA should have been able to operate with lower costs and to have been more profitable because of Mr Arpey. Of course, this is an empirical question and I dont have any data. And clearly the views of the CEO were not enough to actually prevent bankruptcy. But that is not the point – Mr Arpey’s views should have reduced the probability of bankruptcy and that is what matters.
A second question immediately follows if the above conjectures are correct. Should an amoral board operating in a country where bankruptcy is relatively easy, hire a CEO who has a moral belief against bankruptcy, not because they support that belief, but because the board believes that this stance will improve profits?