American Airlines AMR financial overview

American Airlines

Discuss how senior management's short-term focus on stock price in a publically traded company can lead to unethical behavior.

If senior management has a short-term focus on stock price as its central motivation, that can lead to unethical behavior. The role of management is to increase the wealth of the shareholders (Friedman, 1970), something that must be done over long run, not the short run. A short-run focus on the stock price does not have to be mutually exclusive to building long-run value, but it often is. Management may either utilize strategies that favor a small short-term return over a broader long-term improvement or it may engage in various forms of accounting fraud to make the company appear more profitable than it actually is. The former is more of a policy choice; it may not be unethical as much as it is stupid. The latter is unethical and all times and sometimes illegal as well. Pursuing means of misleading the markets in order to boost a share price is counter to the pursuit of long-term value, so senior managers would be violating their duty of care to the shareholders in such a situation.

2. American Airlines has historically manipulated its earning by deferring aircraft maintenance. Discuss how this behavior may be unethical to both its shareholders and customers.

Hughes and Schlangenstein (2010) point out that American was fined $24.2 million in 2010 for its practice of delaying maintenance on its flights. This practice is undertaken to avoid spending that money, and the reduction in expenses boosts the profit of the company. While the delayed maintenance finds its way to the balance sheet as a deferred liability, it stays off the income statement. This gives the airline the appearance of being more profitable than it actually is.

This practice is unethical to the shareholders because it is misleading. The company has a duty to produce financial statements that accurately reflect the financial condition of the company, and arguably this tactic counters that. Essentially, while the deferred maintenance is still on the books, it is buried in an obscure corner of the balance sheet -- probably explained only in the notes -- rather than being up front on the income statement. If the company does not clearly disclose the nature of the deferred liabilities, then it is contributing to misleading the investor, who will have a much more difficult time understanding that maintenance has been deferred rather than conducted.

For the passengers, deferred maintenance is even more unethical, and this is why the FAA levied the fine against American. The company has a duty of care to protect the safety and well-being -- and life -- of its passengers and crew. To do so, it needs to follow the rules with respect to maintenance. The move to defer maintenance illustrates that the company chose not to follow the rules, in order to gain a short-term boost to the stock price. Indeed, when pilots began enforcing maintenance rules as part of a rule-book slowdown protest, the company found itself in chaos, so accustomed had it become to deferring needed maintenance (Yglesias, 2012).

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3. Analyze the factors that contributed to American Airlines' decision to file for bankruptcy in 2011 and provide evidence regarding whether it was ethical for management to do so.

There are differing opinions on why American filed for bankruptcy in November 2011. The company was apparently still solvent, but entered bankruptcy in order to rid itself of some of the commitments to its employees. The airline sought to restructure union contracts, something that it first did through negotiations with some unions and then with the pilots' union it went through the bankruptcy judge (Yglesias, 2012). That move left the airline without a contract for its pilots. American was forced to extend its bankruptcy in order to buy time to complete a negotiation with the pilots' union (McLaughlin, 2012). Glassman (2012) supports this idea that American airlines cannot be competitive with high labor costs. This makes for an interesting argument that a set of airlines that compete against each other with roughly the same cost structure cannot be competitive -- who is outcompeting them?

If lowering labor costs was the key impetus for the bankruptcy filing, this is unethical behavior. Laboring labor costs is not inherently unethical, but the use of the bankruptcy filing to circumvent or tear up existing contracts is. The contracts that were either renegotiated or torn up during the bankruptcy proceeding where signed in good faith, and if American wanted a better deal next time, it should have waited until the contracts ran out. Bankruptcy in this case is a smokescreen for impatience. That senior management may emerge from bankruptcy with hundreds of millions of dollars' worth of shares raises the possibility that the lack of patience had more to do with personal gain that anything else (Ygelsias, 2012). Managers at American eroded the wealth of the company with the bankruptcy filing. They had duties both to honor the contracts that they had signed and to seek ways to increase shareholder wealth. By failing to do either of those things, the senior managers at American Airlines failed to uphold their ethical duty.

4. Evaluate the impact of the bankruptcy on American Airlines' current employees and retirees. Discuss the ethical implications for a corporation to reduce or abandon its retirement benefit obligations. Support your answer.

One of the agreements that American Airlines sought to nullify was its retiree benefits. With 130,000 covered workers and little free cash flow to pay them their benefits, American found itself with four underfunded pension plans. The company is seeking to terminate its underfunded plans and replace them with a 401k offering (Miller, 2012). The pension plan was a defined benefit plan, which offered employees specific benefits. The company needed to make enough contributions to the plan in order to cover these benefits. However, it is not uncommon for companies to cut corners in difficult times to preserve cash flow. The pension commitments often fell by the wayside, leaving many defined benefit plans woefully underfunded today, American's being one of them

From an ethical perspective, there is little cause to justify offloading the pension benefit if the company intends to continue operating. The pension deals were signed in good faith with the company's unions. That the company has not supplied these pensions with adequate funding is no fault of the employees. If the company was not going to be a continuing operation, it would be more ethically reasonable to restructure the pensions. However, American entered bankruptcy with the specific intent to cut these pensions while maintaining an ongoing business. This basically means that management is using bankruptcy protection to unwind existing contracts, as opposed to using pension re-adjustment to salvage an otherwise dying business.