December 20, 2011, 10:59 AM EST

By Mary Schlangenstein

(Updates bond price in 10th paragraph.)

Dec. 15 (Bloomberg) -- AMR Corp. "most certainly" will cut jobs as the parent of American Airlines revamps its fleet and flight network and may become a takeover target during its bankruptcy, Chief Executive Officer Tom Horton said.

American, the third-biggest U.S. airline, will decide "in the coming weeks" about what aircraft it will keep, the size of its route system, how many workers the Fort Worth, Texas-based carrier requires and what it needs to negotiate in labor contracts, he said in a letter to employees today.

"We will restructure our debt and aircraft leases, and as we do we will undoubtedly need to ground some planes and resize our network before we can turn the corner and grow again," Horton said. "And, regrettably, we will most certainly end the process with fewer people than we have today."

AMR, which filed for Chapter 11 protection Nov. 29, has begun trimming jobs and warning of potential additional furloughs at the American Eagle regional unit. Twenty pilot trainees were laid off earlier this week, and 218 pilots and flight attendants at Eagle's Executive Airlines were told yesterday that their jobs may be cut by the end of January.

Some parties involved in AMR's bankruptcy want the company "to shrink dramatically, close hubs and lay off thousands more to create the greatest value for creditors" while others will call for AMR to be sold or broken up, Horton said.

Takeover 'Opportunists'

"And as we've seen before in this situation, there may be opportunists who wish to acquire our company while we are in this situation," he said. Horton was named CEO after Gerard Arpey retired from the job when AMR's board voted to file bankruptcy.

US Airways Group Inc. made an unsuccessful hostile bid for Delta Air Lines Inc. in 2006, during Delta's bankruptcy. The current US Airways emerged from its last stay in bankruptcy through a merger with America West Holdings Corp.

More recently, US Airways said this year that there is room in the U.S. airline industry for more consolidation and that it will participate.

AMR expects to fund operations through its bankruptcy with $4.1 billion in cash and short-term investments, the most ever for a U.S. carrier filing Chapter 11. The cash reserve may help it avoid a takeover attempt by eliminating the need for outside financing, analysts including James M. Higgins of Ticonderoga Securities LLC have said.

Bonds, Credit Swaps

AMR's 10.5 percent notes due in October rose 0.25 cent to 95 cents on the dollar at 4:23 p.m. in New York, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

Credit derivatives traders settling contracts that protected against a default by AMR today set a value of 23.5 cents on the dollar for its debt. The price means sellers of the swaps would pay 76.5 cents on the dollar to buyers of protection to settle the contracts, according to data posted on the website of administrators Markit Group Ltd. and IntercontinentalExchange Inc.'s Creditex division.

AMR is the last of the largest full-service U.S. carriers to seek court protection. The company blamed the filing in part on its inability to win new labor agreements that would reduce expenses and boost productivity. The airline has said it has an $800 million cost disadvantage to peers that shed pensions and some retiree benefits and changed union contracts in bankruptcy.

"As part of the restructuring process, we'll need to finally agree upon next-generation, competitive labor contracts," Horton said. "This will all be difficult, but I assure you our objective will be to create a successful company and the best outcome for the greatest number of people."

Six analysts surveyed by Bloomberg have said they expect American to shrink in bankruptcy by as much as 10 percent.

A United Continental Holdings Inc predecessor, UAL Corp., trimmed capacity 8 percent in the months after its December 2002 filing. Delta reduced domestic capacity by 16 percent in 2006, its first full year in Chapter 11.

--With assistance from Mary Childs in New York. Editors: John Lear, Jeffrey Tannenbaum

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net