AA's Debt

[Bob Owens]

We often see where company pundits point out that AA has heavy debt compared to its peers who shed debt through BK. When we look at these figures, meant to cause alarm, we must recognize that the way corporations report debt and the way we look at debt are different. For instance when we borrowed money for our homes or carry a balance on our credit cards we tend to look at the principle as our debt and not how much we would pay over the term of the loan. If we were to make minimum payments on credit cards a $1,000 charge would add $3400 to your total liabilities. Companies take all those payments into consideration, along with leases and other agreements. Of course with loans usually if you make early payments to the principle you can save a lot of money.

With the NBA finals being played out in two arenas where AA has bought naming rights we can see not only another example of AA excess, spending tons of money for executive perks like skyboxes that allow the bosses to get tax free entertainment at not only the tax payers expense but employees as well, but how the debt figure gets inflated.

AA has a 30 year deal with Dallas that reportedly will run $195 million ($6.5million annually)and a 20 year deal with MIA that will run $42 million($2.1 million annually). Now $8.6 million a year isnt going to bust AA but together these commitments increase AA long term liabilities by nearly a quarter of a billion dollars. That $8.6 million could restore the pilot cap on our medical and still have $5 million a year left over. Skyboxes for the execs or more affordable medical coverage for workers? You know their answer.

Some claim this $8.6 million a year or quarter of a billion liability is money well spent because of how many times AA will be mentioned on the news for free, I dont buy it because I dont think that anybody listening to sports score reports draws a link, any more than when Shea Statium was mentioned that it sparked in interest in who Mr Shea was or to find out and buy whatever he marketed. With that line of thinking I have to wonder what value they put on 9-11 where nearly every person who had access to a TV heard about the two AA airplanes that were used in 9-11 had, how many times was AA mentioned for free there? The question is will people associate hearing AA from a sports score report with taking a vacation or getting to a business meeting? Its not as if American Airlines is a new company and lacks recognition,especially in Miamia and Dallas.

When we look at AA's total debt & liabilities and compare it to how much they bring in annually they probably look a lot better off than any of us. So dont let the figure alarm you, most of AA's total liabilities are forward looking long term leases and other committments, many of those committments provide AA favorable rates and protection from big increases for decades into the future, not money borrowed and spent to keep the operation afloat in the past, like the way we have have to do to keep our families afloat. As you can see with the naming rights relatively small annual liabilites over a long period of time can make the figure appear to be very large. Consider the fact that naming rights on a Stadium can add a quarter of a billion dollars, then think about all the terminals, hangars and aircraft that have leases attached them for years into the future, then the Total debt figure doesnt seem so ominous. If AA has $20 billion in debt and some of the components of that debt go nearly 30 years into the future figure, at current earnings they will likely bring in $660 billion in revenue to cover those liabilites. In other words they will likely bring in more than 30 times what they owe.

Cash flow is more important figure and AA is sitting on $6 billion in cash, more than ever before.

 

[commavia]

AA has a 30 year deal with Dallas that reportedly will run $195 million ($6.5million annually)and a 20 year deal with MIA that will run $42 million($2.1 million annually). Now $8.6 million a year isnt going to bust AA but together these commitments increase AA long term liabilities by nearly a quarter of a billion dollars. That $8.6 million could restore the pilot cap on our medical and still have $5 million a year left over. Skyboxes for the execs or more affordable medical coverage for workers? You know their answer.

If - and I'm not sure - you are suggesting (in the context of this whole post) that this is a debt, it is not - those future financial commitments towards sports venue sponsorships is a liability, but not a debt.

Two very different things. All debts are liabilities, but not all liabilities are debts.

As of 1Q11, AMR was carrying about $31B in liabilities (about $9.8B of those due before March 31, 2012), of which about $11.3B was debt ($1.8B due before March 31, 2012). A huge portion of AMR's liabilities are in simple, straightforward "cost of doing business" type liabilities like accounts payable, accrued liabilities, etc., and in "Air Traffic Liability," which is essentially the future cost to AMR of providing the services for which it has already received payment, but not yet provided service - i.e., the future cost to AMR of carrying people who have already bought and paid for tickets, and the future cost to AMR of outstanding AAdvantage miles. Another big component of AMR's liabilities are capital lease obligations, which are AMR's leases on long-lived, capitalized assets (almost entirely aircraft). And finally, the largest single chunk of AMR's liabilities are in their pension and retirement benefits.

As for the debt, AMR has various debt and revolving credit instruments with maturities ranging from basically right now out to decades from now - at interest rates ranging from 5% to 13%.

The point in all this being: these aren't just numbers the company is making up, and true, while not all of these numbers are all that perilous or ominous (i.e., as long as the company basically keeps operating and taking in cash, then a huge portion of these liabilities will be fulfilled simply through remaining as going concern), it is also true that AMR is carrying a lot of debt at the moment, and does need to reduce it.

When we look at AA's total debt & liabilities and compare it to how much they bring in annually they probably look a lot better off than any of us. So dont let the figure alarm you, most of AA's total liabilities are forward looking long term leases and other committments, many of those committments provide AA favorable rates and protection from big increases for decades into the future, not money borrowed and spent to keep the operation afloat in the past, like the way we have have to do to keep our families afloat.

Not quite.

AA has a substantial debt load that it is carrying, in part because it did not abrogate and/or renegotiate many of its debt financing instruments in bankruptcy like many of its competitors, and also because it has not benefiting from shedding other non-debt legacy costs (like labor) in bankruptcy, and thus has had to rely on more debt in the last few years to finance its operations whereas other airlines have had more free cash flow.

That's not to say that AMR's debt challenge is insurmountable. AMR management has proven quite adept in the last few years at continually recycling debt instruments over and over - financing new debt in good times, when the markets were more favorable (i.e., 2007, etc.), at more relatively more favorable terms, and using those debt instruments to finance AMR's operations in relatively worse economic/credit climates (i.e., the fuel spike of 2008 or financial meld town of 2009). It is not an ideal way to finance a company, and it cannot go on forever, but as long as AMR does continue to generate cash flow from operations, and the economy doesn't entirely disintegrate and/or the credit markets don't completely seize up, the company can survive.

The issue is that AMR's debt burden - while not insurmountable - is (relatively speaking) worse than many of its peers. The company didn't dump debt, dump pensions, outsourced heavy maintenance, outsource more and more of the flying to regionals, lay off even more people, cut pay and work rules even further, etc. as occurred at many of the bankrupt legacy carriers (and was already in place at many of the low-fare carriers). As such, AMR is carrying a debt load that is comparable or higher than many of its peers, but without many of the post-bankruptcy financial advantages that those peers enjoy.

This is not some spin that the company is putting on just to scare everyone (although I'm not surprised to see it portrayed that way here). Wall Street and independent analysts have concluded much the same thing: AMR is financially under-performing relative to many of its peers.

Cash flow is more important figure and AA is sitting on $6 billion in cash, more than ever before.

Agreed. Cash flow is the more important number, but, alas, there too, AMR is under-performing its peers. AMR is generating billions in operating cash flow, but it is generating less - relative to size (revenue) - than many of its post-bankruptcy legacy and/or low-fare peers. This is due at least in part, again, to the legacy costs that AMR was not able to shed in bankruptcy, like pensions, unfavorable leases, etc., that all have a very tangible, cash cost.

 

[AAviator]

From the Q1 earnings transcript:

In addition, we anticipate that within our current fleet, aircraft that are Section 1110-eligible and are valued at over $1 billion -- well over $1 billion, will become unencumbered by the end of 2011, providing our company with additional financial flexibility.

http://seekingalpha.com/article/264955-amr-s-ceo-discusses-q1-2011-results-earnings-call-transcript



Also, according to Boeing, AA has ordered another 773. Makes for 6 now.

 

[Bob Owens]

If - and I'm not sure - you are suggesting (in the context of this whole post) that this is a debt, it is not - those future financial commitments towards sports venue sponsorships is a liability, but not a debt.

Two very different things. All debts are liabilities, but not all liabilities are debts.

They can be, or they can be part of the same, correct or not the terms are often used interchangibly. When the company told us in 2003 that they had $22 billion in debt, they were obviously talking about Total debt which can include Total Liabilities as well. So I'm describing the companys use of the word Debt when more accurately, according to you, they should have said "Liabilities". The reason why they did is clear, if they used the term debt, the image is one of cash that has been borrowed and must be paid back which is much more ominous than if they said "AA has $22 billion in liabilities", because that term would present a less defined image that would have encouraged inquisition with the end result that the intended impact of the figure would be mitigated.

and also because it has not benefiting from shedding other non-debt legacy costs (like labor) in bankruptcy

really? How do you figure that when our rates are lower than some of our BK peers? You will probably cite the pension obligations, well that fits in with what I was saying before. The pension is a big liability but it currently saves them money. The company admitted that switching over to a DC plan would actually cost them more now but they figured over the long term that they would save money. Obviously that would not enhance their current performance.

With reduced wages and guys working two jobs to get by most will end up working beyond 67. The stressfull lives they endured working shifts into old age will likely take its toll leading to early death and minimum payments. They are going to save a ton of money on the pilots as well now that they can work to 65. My question to you is lets say AA got to freeze the pension, once the plan paid out what would happen to the excess funds left in the plan if there were any?

That's not to say that AMR's debt challenge is insurmountable. AMR management has proven quite adept in the last few years at continually recycling debt instruments over and over - financing new debt in good times, when the markets were more favorable (i.e., 2007, etc.), at more relatively more favorable terms, and using those debt instruments to finance AMR's operations in relatively worse economic/credit climates (i.e., the fuel spike of 2008 or financial meld town of 2009).

That contradicts what you said earlier. While BK allowed other carriers to shed and rewrite its debts going forward there would obviously be a penalty incurred, higher, less favorable rates going forward. You dont think that just because the banks wrote down those losses that they arent going to make up for them going forward do you? We saw how the airports compensated for reduced flying, they raised fees to make up for it, as much as 30%.

, but as long as AMR does continue to generate cash flow from operations, and the economy doesn't entirely disintegrate and/or the credit markets don't completely seize up, the company can survive.

That part of the statement is pretty much universal.

The issue is that AMR's debt burden - while not insurmountable - is (relatively speaking) worse than many of its peers. The company didn't dump debt, dump pensions, outsourced heavy maintenance, outsource more and more of the flying to regionals, lay off even more people, cut pay and work rules even further, etc. as occurred at many of the bankrupt legacy carriers (and was already in place at many of the low-fare carriers). As such, AMR is carrying a debt load that is comparable or higher than many of its peers, but without many of the post-bankruptcy financial advantages that those peers enjoy.

So you are claiming that operating post bankruptcy doesnt carry any disadvantages?

This is not some spin that the company is putting on just to scare everyone (although I'm not surprised to see it portrayed that way here). Wall Street and independent analysts have concluded much the same thing: AMR is financially under-performing relative to many of its peers.

The question is why?

Agreed. Cash flow is the more important number, but, alas, there too, AMR is under-performing its peers. AMR is generating billions in operating cash flow, but it is generating less - relative to size (revenue) - than many of its post-bankruptcy legacy and/or low-fare peers. This is due at least in part, again, to the legacy costs that AMR was not able to shed in bankruptcy, like pensions, unfavorable leases, etc., that all have a very tangible, cash cost.

Or is it due to expensive and unneccisary mods, upgrades, sponsorships, terminals, etc,etc,etc? Aa also has the best fuel hedges in the industry, a good move but it ties up a lot of money.We saw the $600 million figure that AA put out there as far as labor, but we did not see how they came up with that figure. Do you have proof that our current lackluster performance is due to unfavorable leases or even pension payments? The way I see it if we had a DC the company would have paid more than they have, true they would not have the liability but depending on the performace of the fund that liability could clear itself, as AA has enjoyed several years where they didnt have to contribute anything to the plan, IIRC back in the 90s they actually withdrew money from the fund because the fund exceeded expectations. They could never make money or have zero contributions with a DC.

 

[commavia]

Apologies in advance for the long reply - I, like many here, hate the long diatribe responses, so I'm sorry for how long this is. I don't mean to offend anyone.

They can be, or they can be part of the same, correct or not the terms are often used interchangibly.

No - with respect, they cannot be used interchangeably - ever. If they are being used interchangeably, that is simply incorrect.

When the company told us in 2003 that they had $22 billion in debt, they were obviously talking about Total debt which can include Total Liabilities as well. So I'm describing the companys use of the word Debt when more accurately, according to you, they should have said "Liabilities". The reason why they did is clear, if they used the term debt, the image is one of cash that has been borrowed and must be paid back which is much more ominous than if they said "AA has $22 billion in liabilities", because that term would present a less defined image that would have encouraged inquisition with the end result that the intended impact of the figure would be mitigated.

Again, no. When the company said $22B in debt - they meant debt, not liabilities. Those are absolutely not the same thing, never have been the same thing, never will be nor can be the same thing. The liabilities number was way higher than $22B, and even today the total liability number is way higher than the total debt number.

This is actually one of the most remarkable success stories that everyone at AMR - and that means management and labor - deserve enormous credit for. In the years since the near-bankruptcy in 2003, AMR has been able to reduce its net debt, defined as total long-term debt less cash and cash equivelants - dramatically, without the benefit of bankruptcy that every single one of AMR's legacy peers has now turned to at least once (or in several cases, more than once). That is a huge achievement that gets little attention but is, in my opinion, profoundly impressive - particularly when considering the course that AMR's peers took.

really? How do you figure that when our rates are lower than some of our BK peers? You will probably cite the pension obligations, well that fits in with what I was saying before. The pension is a big liability but it currently saves them money. The company admitted that switching over to a DC plan would actually cost them more now but they figured over the long term that they would save money. Obviously that would not enhance their current performance.

Well, I'm sure I'll get attacked for it (again), but I'd say there are several ways that AMR's labor costs are at a disadvantage. The first is definitely the pension, which is a big cash (and again, cash is what matters most) cost that AMR has to expend each year, and that many of AMR's competitors no longer have to (or never had to in the first place). Beyond that, AMR is less efficient - as measured by revenue generated per employee - than most of its legacy peers, and all its low-cost competitors. That is to be expected, of course, to a certain extent, since AA hasn't outsourced overhauls. But that brings me to another big driver of added labor cost that I think is ofter overlooked at AMR: AMR generates a larger portion of its system ASMs (i.e., the overall capacity generated by the entire AMR/AA-branded network) from mainline than many of its legacy peers. Because AA has long had one of the more restrictive SCOPE clauses among the legacy carriers, other airlines (especially Delta and USAirways, but increasingly now post-bankruptcy United as well) have far more aggressively shifted more and more capacity to non-union and/or much-lower-labor-cost regional operators. Thus, the mix of Delta's overall system ASMs is relatively less weighted towards mainline labor than, say, AA, which means that even if AA mainline is competitive on unit labor costs at Delta or United or USAirways mainline (and we won't even get into the argument of whether they are or not), that comparison becomes less and less meaningful over time since in many cases its now no longer AA mainline competitive against Delta or United mainline, but AA mainline competing against Delta Connection or United Express.

As for defined benefit versus defined contribution - I don't know. It's true, I, too, have seen reports that suggest that, at least in the short-run, a defined contribution plan would be more expensive. The big difference, over the long run, is the control of the long-term liability which is what drives AMR's pension liability number up so high: AMR has signed up for a particular benefit that it has guaranteed a pensioner at a certain point in the future, and it must find a way to deliver that benefit - no matter what it costs. That is a huge liability because so much of that equation is outside of AMR's control, including how long that person works, how old they are when they retire, how long they live (and thus how long they collect the benefit), and of course how the financial markets do (since pension funds generate their benefits through investments). With a defined contribution plan, it's really simple: the company puts in X on this date, and then whatever happens to the money after that point is all on the pensioner, not the company - in essence, the defined contribution shifts the liability to the pensioner.

My question to you is lets say AA got to freeze the pension, once the plan paid out what would happen to the excess funds left in the plan if there were any?

I admit - I am not a pension accountant, or a retirement lawyer, and certainly no expert. But my understanding has always been that there wouldn't be any "excess," since defined benefit pension funds are effectively almost like non-profit organizations - they are non-excess, meaning that the company funds based on a myriad of formulas and calculations that take into account anticipated funding levels each year, expected returns on investment from the fund's assets and investments, actuarial estimates of how many people will retire that year, how many will die that year, how many people currently receiving benefits will live to age x or y or z, etc.

In other words, as pensioners retire, the company's funding obligation (read: its liability, but not its debt) goes up, and thus they have to pay more in those years with more people retiring to anticipate and support the higher pension benefit outlays. However, in later years, as pensioners die, the funding obligation goes down, and thus the company pays less into the fund. If, for example, there was a year when the fund actually ran a surplus - which could happen due to fewer people retiring than expected, more people dying than expected, or the fund's investments performing better than expected - then the company doesn't have to contribute anything.

In short: my understanding is that there isn't ever an "excess" because any overage in the plan in one year is made up for by less cash contribution to the fund by the company, or by a "shortfall" in another year.

That contradicts what you said earlier. While BK allowed other carriers to shed and rewrite its debts going forward there would obviously be a penalty incurred, higher, less favorable rates going forward. You dont think that just because the banks wrote down those losses that they arent going to make up for them going forward do you? We saw how the airports compensated for reduced flying, they raised fees to make up for it, as much as 30%.

In practice, no. AMR has not seen any substantive advantage in the capital markets (which would manifest itself in the form of lower borrowing costs, or more simply, lower interest rates on debt) versus its peers. The reason is that when a company goes bankrupt, that company effectively almost ceases to exist. It is almost a new company, a proverbial phoenix from the ashes, that rises out of the remains of the old company and gets to take with it all the good stuff that it has renegotiated. As such, AMR's post-bankruptcy peers are now issuing debt based on their current, post-bankruptcy financial conditions, complete with frozen/dumped pensions, relaxed labor rules, lower pay scales (not in all job categories, but certainly in some), outsourced heavy maintenance, outsourced flying to regionals, etc. In that context, looking purely at their balance sheets today, and not accounting for the bad deeds of the old, now effectively-defunct carrier they replaced, they are borrowing at lower rates in many cases than AMR.

It's unfortunate - and the definition of moral hazard at work - but it's reality.

So you are claiming that operating post bankruptcy doesnt carry any disadvantages?

I don't know about no disadvantages, but I must say, it does seem like for some of AMR's post-bankruptcy competitors - particularly Delta - the disadvantages of bankruptcy have been far outweighed by the benefits derived from using bankruptcy to force lower costs on various stakeholders, including leaseholders, creditors, vendors, and yes, labor.

Call me old fashioned, but I do genuinely believe that AMR tried to do the right thing by not filing for bankruptcy, and I think both AMR management and the unions deserve infinite credit for that concerted effort they made back in 2003. But, alas, the truth - at least it seems to me - is that in this world you don't always benefit from doing the right thing. It used to be that bankruptcy was seen as the definition of "failure" for a publicly-traded company. Today, you will find no shortage of people - including one Delta acolyte here on this board - who would tell you that bankruptcy is just a business strategy. Sad, but true.

 

[Bob Owens]

This is actually one of the most remarkable success stories that everyone at AMR - and that means management and labor - deserve enormous credit for. In the years since the near-bankruptcy in 2003, AMR has been able to reduce its net debt, defined as total long-term debt less cash and cash equivelants - dramatically, without the benefit of bankruptcy that every single one of AMR's legacy peers has now turned to at least once (or in several cases, more than once). That is a huge achievement that gets little attention but is, in my opinion, profoundly impressive - particularly when considering the course that AMR's peers took.

Well that puts you and FWAAA at odds. He says that the amount of debt they cleared isnt that impressive.

Well, I'm sure I'll get attacked for it (again), but I'd say there are several ways that AMR's labor costs are at a disadvantage. The first is definitely the pension, which is a big cash (and again, cash is what matters most) cost that AMR has to expend each year, and that many of AMR's competitors no longer have to (or never had to in the first place).

Which of AA competotors doesnt have a 401k Match? The fact is even the company admitted that the 401K match would cost them more in cash now than the DB plan they still offer. In fact for 2009 the company didnt have to contribute anything, compare that to their competitors who had to match some of the funds their employees put in and AA was way ahead. AA even aditted that per capita their pension ties up less cash than their competotors 401k plans.

Beyond that, AMR is less efficient - as measured by revenue generated per employee - than most of its legacy peers, and all its low-cost competitors. That is to be expected, of course, to a certain extent, since AA hasn't outsourced overhauls. But that brings me to another big driver of added labor cost that I think is ofter overlooked at AMR: AMR generates a larger portion of its system ASMs (i.e., the overall capacity generated by the entire AMR/AA-branded network) from mainline than many of its legacy peers. Because AA has long had one of the more restrictive SCOPE clauses among the legacy carriers, other airlines (especially Delta and USAirways, but increasingly now post-bankruptcy United as well) have far more aggressively shifted more and more capacity to non-union and/or much-lower-labor-cost regional operators. Thus, the mix of Delta's overall system ASMs is relatively less weighted towards mainline labor than, say, AA, which means that even if AA mainline is competitive on unit labor costs at Delta or United or USAirways mainline (and we won't even get into the argument of whether they are or not), that comparison becomes less and less meaningful over time since in many cases its now no longer AA mainline competitive against Delta or United mainline, but AA mainline competing against Delta Connection or United Express.

Because AA has kept its business model where they do their OH in house the only comparasion that has any validity would be present vs past performance, in that regard AA has seen their revenue per employee nearly double.

As for mainline vs regoinal how many of AAs competitors actually own their regionals? UAL had tried to set up "Ted" and Delta had their in-house flop. Do you have any examples of where AA mainline competes against Delta Connection or United Express? I know of places where AE competes against USAIR (NY-BOS, NY -DC, etc).

I admit - I am not a pension accountant, or a retirement lawyer, and certainly no expert. But my understanding has always been that there wouldn't be any "excess," since defined benefit pension funds are effectively almost like non-profit organizations - they are non-excess, meaning that the company funds based on a myriad of formulas and calculations that take into account anticipated funding levels each year, expected returns on investment from the fund's assets and investments, actuarial estimates of how many people will retire that year, how many will die that year, how many people currently receiving benefits will live to age x or y or z, etc.

In other words, as pensioners retire, the company's funding obligation (read: its liability, but not its debt) goes up, and thus they have to pay more in those years with more people retiring to anticipate and support the higher pension benefit outlays. However, in later years, as pensioners die, the funding obligation goes down, and thus the company pays less into the fund. If, for example, there was a year when the fund actually ran a surplus - which could happen due to fewer people retiring than expected, more people dying than expected, or the fund's investments performing better than expected - then the company doesn't have to contribute anything.

In short: my understanding is that there isn't ever an "excess" because any overage in the plan in one year is made up for by less cash contribution to the fund by the company, or by a "shortfall" in another year.

Back in the 90s, the company actually made money off the fund. IIRC they told us not to be so impressed by the profits they reported because much of the profits were not from operations but from the investment earnings of the pension fund. So while these funds do have huge potential liabilities they also have the potential to be self funded, if the markets are right. Again, lets say they freeze the pension, years down the road, after they've met their committments what would happen to any funds that were left over, if any? We saw recently where the company had decided to cancel its supplimental medical plan, which is also supposed to be non-profir but was funded through employee contributions, they had over $70 million left in the plan, which they pocketed. Sure they can only use those funds for medical, but that offsets what they would have to take out of their general funds.

In practice, no. AMR has not seen any substantive advantage in the capital markets (which would manifest itself in the form of lower borrowing costs, or more simply, lower interest rates on debt) versus its peers. The reason is that when a company goes bankrupt, that company effectively almost ceases to exist. It is almost a new company, a proverbial phoenix from the ashes, that rises out of the remains of the old company and gets to take with it all the good stuff that it has renegotiated. As such, AMR's post-bankruptcy peers are now issuing debt based on their current, post-bankruptcy financial conditions, complete with frozen/dumped pensions, relaxed labor rules, lower pay scales (not in all job categories, but certainly in some), outsourced heavy maintenance, outsourced flying to regionals, etc. In that context, looking purely at their balance sheets today, and not accounting for the bad deeds of the old, now effectively-defunct carrier they replaced, they are borrowing at lower rates in many cases than AMR.

How do you know that? Where can you find the figures that catagorize all the loans they have, who they have them with and what the terms are?

Call me old fashioned, but I do genuinely believe that AMR tried to do the right thing by not filing for bankruptcy, and I think both AMR management and the unions deserve infinite credit for that concerted effort they made back in 2003. But, alas, the truth - at least it seems to me - is that in this world you don't always benefit from doing the right thing. It used to be that bankruptcy was seen as the definition of "failure" for a publicly-traded company. Today, you will find no shortage of people - including one Delta acolyte here on this board - who would tell you that bankruptcy is just a business strategy. Sad, but true.

I wouldnt call you old fashioned, I'd call you a Capitalist. "The "right thing" in your book probably isnnt maintaining a pension, its preserving or increasing shareholder equity, which after all, in a Capitalist system is the primary responsibilty of management. Of course thats textbook theory where all relationships are pure not the reality of the airline industry where most of the industry is owned by the very same entities that are its biggest creditors. Where the rules simply dont apply.

 

[commavia]

Well that puts you and FWAAA at odds. He says that the amount of debt they cleared isnt that impressive.

Well that's fine - he may have his opinion, I have mine. I respect (most) peoples' opinions, and I need not necessarily agree with anyone or everyone on anything or everything.

Which of AA competotors doesnt have a 401k Match? The fact is even the company admitted that the 401K match would cost them more in cash now than the DB plan they still offer. In fact for 2009 the company didnt have to contribute anything, compare that to their competitors who had to match some of the funds their employees put in and AA was way ahead. AA even aditted that per capita their pension ties up less cash than their competotors 401k plans.

Several things:

First, a 401(k) match requires far less contribution than a defined benefit pension and, critically, again, the liability is on the employee, not the employer. Big, big difference.

Second, I don't know enough to argue over cash cost now versus cash cost long-term, other than to say that defined benefit pension plans shift the liability - which in time creates a cash cost - onto the employer, while defined contribution plans, like 401(ks), do not create such a large liability.

As for mainline vs regoinal how many of AAs competitors actually own their regionals? UAL had tried to set up "Ted" and Delta had their in-house flop.

AMR is basically the only U.S. legacy left that owns its regional (besides Delta which still owns Comair because it cannot offload it on anyone, just like AMR can't give Eagle away as nobody wants it). That is precisely the point: in the last 10-15 years, all the other legacies have exited the regional airline ownership business, and instead sold off and farmed out basically all of their regional flying to the lowest bidder through competitions - they have set the regionals off against each other. This has driven the regionals to become astoundingly aggressive on unit cost against each other, which has lowered the overall operating cost for a huge mix of other U.S. legacies' networks - again, because several of those legacies, especially post-bankruptcy, have almost no restrictions on their regional capacity. As such, Delta, United, USAirways, etc. have been able to retain a far larger portion of the revenue their networks generate from their non-owned, contract regional operators because those legacy carriers are paying so much less for those regional operators' feed.

Do you have any examples of where AA mainline competes against Delta Connection or United Express? I know of places where AE competes against USAIR (NY-BOS, NY -DC, etc).

There are too many to count. In Albuquerque, Tucson, Austin, El Paso, San Antonio, Huntsville, Birmingham, Louisville, Colorado Springs, and on and on, AA operates primarily mainline stations while most of their legacy competitors operate largely or entirely RJ schedules operated near-entirely by non-owned, contract regional carriers.

It's not necessarily about AA mainline flying against regional on the same route (although that certainly does happen, ORD-LGA comes to mind as one big example) - it's more about the overall network. The AA network - in various markets - is weighted more heavily towards mainline than many of its legacy competitors' networks. Just go look at all their traffic reporting - you can see what % of the system ASMs are operated by mainline vs regional.

How do you know that? Where can you find the figures that catagorize all the loans they have, who they have them with and what the terms are?

It is reported in each AMR annual (10-K) and quarterly (10-Q) SEC filing - they are required by law to disclose and detail the specifics of their outstanding long term debt, including maturity timelines (i.e., when the different loans are due), and the respective cost of capital (i.e., interest rate) associated with each loan.

In AMR's most recent such report - their 1Q11 10-Q filing, this information is found on page 6 (page 9 in the pdf file).

I wouldnt call you old fashioned, I'd call you a Capitalist. "The "right thing" in your book probably isnnt maintaining a pension, its preserving or increasing shareholder equity, which after all, in a Capitalist system is the primary responsibilty of management.

I certainly am a capitalist, and a proud one and that, and I believe in delivering optimized, sustainable returns for shareholders, which also means doing what's right for stakeholders - including employees.

That being said, getting back to that whole moral hazard thing, AMR is at a disadvantage today because they are still offering a defined benefit plan while all of their legacy competitors have either frozen and/or dumped at least some of their plans.

And frankly, is defined benefit pension plans for new hires really the sword that AMR union labor is going to fall on, anyway? Does it really matter to you all that much of new hires coming in today get a pension or a 401(k)? I know lots of flight attendants who long ago happily accepted that new hires wouldn't get pensions, and they don't seem to care one bit.

Of course thats textbook theory where all relationships are pure not the reality of the airline industry where most of the industry is owned by the very same entities that are its biggest creditors. Where the rules simply dont apply.

The sames rules apply in the airline industry that apply everywhere else.

 

[eolesen]

in many cases its now no longer AA mainline competitive against Delta or United mainline, but AA mainline competing against Delta Connection or United Express.

Bingo. And the main factors holding AA back are the ASM cap in the TWU's contract and the scope clause in the pilots contract. Those two clauses are supposed to create job protection, but the reverse is happening. AA won't put mainline in those markets, and eventually jobs are lost because AA can't regain the traffic who finds the mixed class E175s several times a day a better option than an ever aging fleet of 50 seaters or waiting for the one or two MD80s AA still tries to fill up.

We were hearing rumors about an Eagle spin in July not too long ago. Tick, tock....

 

[WorldTraveler]

This is actually one of the most remarkable success stories that everyone at AMR - and that means management and labor - deserve enormous credit for. In the years since the near-bankruptcy in 2003, AMR has been able to reduce its net debt, defined as total long-term debt less cash and cash equivelants - dramatically, without the benefit of bankruptcy that every single one of AMR's legacy peers has now turned to at least once (or in several cases, more than once). That is a huge achievement that gets little attention but is, in my opinion, profoundly impressive - particularly when considering the course that AMR's peers took.

Airlines generate lots of cash… they can use it in a number of ways… AA for much of the past decade didn’t invest much in its product – didn’t order as many airplanes as its peers – and did pay down a lot of debt… the last couple years were good for the airline industry and AA used that recovery to generate cash to pay down debt.. but much of that debt was paid down at a time when other carriers were expanding and AA was not… AA is now buying airplanes when other carriers are not and also when cash flow is going down… and thus AA’s debt is going up.. on top of the losses that AA is racking up compared to its peers… for much of the past decade (since 2003), AA has been “out of sync” with the industry – AA has cut capacity when others haven’t, AA is now growing when others aren’t… AA has reduced debt because it didn’t do what others did… but AA also is now faced with keeping capacity in the system and with adding costs and debt when others are reducing theirs… the question is how long AA can continue to loss money while doing everything in opposite cycles of the rest of the industry… long term buying aircraft and not cutting capacity might make sense but it comes at the cost of reducing operational performance now (being unable to increase fares as much as competitors who are pulling capacity) and then not getting the benefits of increased revenues during the up part of the cycle because those other carriers are invading AA markets…
Except that a DB plan it isn’t a larger cash cost… it adds debt but actually allows AA to shift today’s costs to tomorrow. DC plans cost MORE money – and there is no shifting the obligation to tomorrow.
Except this makes no sense… regional carrier costs on a CASM basis are HIGHER than mainline costs for all carriers. Those other carriers have the ability to use MORE HIGHER EFFICIENCY 70 and 76 seat RJs than AA does… that is what affects their profitability.
Labor costs are immaterial… the total cost of the product delivered (mainline vs regional) is what matters. AA is at a disadvantage because of its less productive labor force… and part of AA’s strategy to deal with that is to buy newer aircraft (which need less maintenance and which deliver more revenue for gallon burned and per pilot, gate and ramp agent, and FA etc)
Which is why companies throughout the US are shifting away from defined benefit plans to defined contribution plans… they cannot afford to keep managing a cost 30-50 years after the benefit was earned…. And in many cases, people can earn more under DC plans by managing them more aggressively/with different biases than the way DB plans are managed… that is certainly the case for me… my rates of return for my 401Ks are far higher than what DB plans earn….I have had the opportunity to return to a DB plan or use a DC plan and I will never return to a DB plan.

There won’t be an excess… and the catchup costs of funding are spread over dozens of years….AA’s pensions just like everyone else’s in the US are insured and they have funding requirements to keep that insurance… but DB plans still require less cash TODAY in favor of longer funding tomorrow.
AA really would prefer to keep the status quo because they are not paying what they would have to pay TODAY… they are paying “on credit” for their pension obligations.. but they will never be able to fully pay the bill as long as benefits continue to accrue…
Further, all of your assumptions are incorrect that other carriers have lower pension costs because of BK… DL is paying its former DB costs PLUS its DC costs for almost all of its employees AT THE SAME TIME. Their pension costs are far higher than AA’s.
Not true with UA or US

Because as much as you and others want to make corporate bankruptcy a moral choice, it is simply a business decision with economic costs. Businesses pay interest rates based on risk. AA’s interest rates are higher than DL and UA’s because AMR is perceived as a higher risk. There is no lingering effect on risk after bankruptcy – unlike with individuals. Risk is calculated based on individual circumstances AS of NOW. Bankruptcy is a LEGAL process to restructure debts and the interest rates are calculated based on the risk of paying that debt NOW, not based on what happened earlier.
Very few people understand the difference between corporate and individual debt and bankruptcy… they are not the same thing.

I don't know about no disadvantages, but I must say, it does seem like for some of AMR's post-bankruptcy competitors - particularly Delta - the disadvantages of bankruptcy have been far outweighed by the benefits derived from using bankruptcy to force lower costs on various stakeholders, including leaseholders, creditors, vendors, and yes, labor.

Call me old fashioned, but I do genuinely believe that AMR tried to do the right thing by not filing for bankruptcy, and I think both AMR management and the unions deserve infinite credit for that concerted effort they made back in 2003. But, alas, the truth - at least it seems to me - is that in this world you don't always benefit from doing the right thing. It used to be that bankruptcy was seen as the definition of "failure" for a publicly-traded company. Today, you will find no shortage of people - including one Delta acolyte here on this board - who would tell you that bankruptcy is just a business strategy. Sad, but true.

Except that once again you don’t understand that what DL did was use bankruptcy to build a better business model and then used that business model to deliver superior results.
The simple fact is that DL shifted less of its total benefits from BK to employees and debtors than either UA, US, or NW… DL obtained about 1/3 of its benefits from debtholders, 1/3 from employees, and 1/3 from increased revenues….most other airlines get much higher percentages from employees and debtholders than DL did.
DL used its benefits to increase its revenues WHICH ALSO help to keep its costs down…
So, once again, your personal bias shows itself in your inability to understand and articulate what actually happened – and more importantly how AA could make the same thing work for them…
In fact, because AA can really shed very little debt because they have virtually no unsecured debt – and they benefit from not paying for their pension obligations now, they have LESS incentive to file for BK than did the previous 4…. But AA has to grow the company while competing against carriers with much lower cost structures – not because they extracted more from their employees – but because those other carriers have gained efficiencies that they are now using… while AA is much less efficient.
Again, part of AA’s efficiency gains will come from new aircraft but they will continue to have a labor cost (due to inefficiency) disadvantage that won’t go away until they deal with the root problem – labor inefficiency.

Which of AA competotors doesnt have a 401k Match? The fact is even the company admitted that the 401K match would cost them more in cash now than the DB plan they still offer. In fact for 2009 the company didnt have to contribute anything, compare that to their competitors who had to match some of the funds their employees put in and AA was way ahead. AA even aditted that per capita their pension ties up less cash than their competotors 401k plans.

Precisely… you get it.. too bad others don’t… AA likes the situation the way it is. Promise now… pay later… and then dump the responsibility when the cost of delivering becomes too burdensome.

As for mainline vs regoinal how many of AAs competitors actually own their regionals? UAL had tried to set up "Ted" and Delta had their in-house flop. Do you have any examples of where AA mainline competes against Delta Connection or United Express? I know of places where AE competes against USAIR (NY-BOS, NY -DC, etc).

Ted and Song were not regional carriers.. they were mainline airline within airline models.
More on your other question later.

Back in the 90s, the company actually made money off the fund. IIRC they told us not to be so impressed by the profits they reported because much of the profits were not from operations but from the investment earnings of the pension fund. So while these funds do have huge potential liabilities they also have the potential to be self funded, if the markets are right. Again, lets say they freeze the pension, years down the road, after they've met their committments what would happen to any funds that were left over, if any? We saw recently where the company had decided to cancel its supplimental medical plan, which is also supposed to be non-profir but was funded through employee contributions, they had over $70 million left in the plan, which they pocketed. Sure they can only use those funds for medical, but that offsets what they would have to take out of their general funds.

Sorry but AMR didn’t do anything anyone else didn’t do in the 90s.. the stock market was roaring hot and overheated.. everyone was making more money on investments today than they had to pay out….and the stock market collapsed and it returned to more normal rates of appreciation…. And now all those promises now cost more than the rates of return… has nothing to do with how good AA was… has everything to do with the fact that the stock market was overheated and generating unsustainable returns.

I wouldnt call you old fashioned, I'd call you a Capitalist. "The "right thing" in your book probably isnnt maintaining a pension, its preserving or increasing shareholder equity, which after all, in a Capitalist system is the primary responsibilty of management. Of course thats textbook theory where all relationships are pure not the reality of the airline industry where most of the industry is owned by the very same entities that are its biggest creditors. Where the rules simply dont apply.

Do you not think that is true in most of the business world? And by the way the majority of investments are owned by pension plans – whether they be debt or equity. EVERYDAY people own American companies…not big nameless companies.

First, a 401(k) match requires far less contribution than a defined benefit pension and, critically, again, the liability is on the employee, not the employer. Big, big difference.
Second, I don't know enough to argue over cash cost now versus cash cost long-term, other than to say that defined benefit pension plans shift the liability - which in time creates a cash cost - onto the employer, while defined contribution plans, like 401(ks), do not create such a large liability.
AMR is basically the only U.S. legacy left that owns its regional (besides Delta which still owns Comair because it cannot offload it on anyone, just like AMR can't give Eagle away as nobody wants it). That is precisely the point: in the last 10-15 years, all the other legacies have exited the regional airline ownership business, and instead sold off and farmed out basically all of their regional flying to the lowest bidder through competitions - they have set the regionals off against each other. This has driven the regionals to become astoundingly aggressive on unit cost against each other, which has lowered the overall operating cost for a huge mix of other U.S. legacies' networks - again, because several of those legacies, especially post-bankruptcy, have almost no restrictions on their regional capacity. As such, Delta, United, USAirways, etc. have been able to retain a far larger portion of the revenue their networks generate from their non-owned, contract regional operators because those legacy carriers are paying so much less for those regional operators' feed.



And frankly, is defined benefit pension plans for new hires really the sword that AMR union labor is going to fall on, anyway? Does it really matter to you all that much of new hires coming in today get a pension or a 401(k)? I know lots of flight attendants who long ago happily accepted that new hires wouldn't get pensions, and they don't seem to care one bit.



The sames rules apply in the airline industry that apply everywhere else.

Except it is false… DC plans again cost MORE… AA has said as much. Too bad you won’t hear it.
And the liability is still the employers with a DC plan… but their liability ends w/ each paycheck when they put the money in the employees 401K account.
That is true… but it also reduces the company’s ability to control that money… few people really want to run the risk of having their employer control their retirement if they can do it themselves

Revenue has nothing to do with it… AA can generate revenue just as effectively with AE… but AE’s costs are a lot higher, esp. considering that APA wno’t allow AA to use larger, more efficient RJs… and thus AA’s regional carrier PROFITS are lower.
Understanding concepts like revenue, cost, and profits is essential if you want to be able to discuss these types of things.
Correct in that the network is what matters.. remember that DL is CUTTING its regional carrier network and shifting flying back to mainline – the only US network carrier doing this (including AA).. because mainline flying is cheaper and DL’s domestic network is larger and redundant enough that DL doesn’t need to fly from one city to 5 hubs.. they can fly mainline jets to one or two hubs and round out their service to a few other hubs… that is why CVG and MEM are being cut… DL doesn’t need 5 hubs east of the Miss…most of which are served by RJs.
As for the list of cities where AA has mainline vs. other carrier RJs, it is true that has a revenue advantage in those cities.. but most of AA’s capacity to/from those cities is to/from DFW and most of it is competitive against WN… AA could not survive in those markets if it had to fly RJs.. and chances are also quite high that AA is losing a lot of money in those markets competing against WN with much lower costs… AA has no choice but to serve the cities around DFW with mainline service or the “pillars” that support the DFW hub collapse…
Outside of Texas and the WN, AA is NOT the largest revenue carrier and even in cities like BHM, SDF, and HSV, other carriers have a larger revenue share.. AA just funnels most of their revenue to/from DFW.
Part of making AA more efficient is using more efficient aircraft and increasing the efficiency of DFW as a hub (already it is fairly efficient)… but it also means that AA’s network is increasingly dependent on one hub for most of the profitable revenue generation with most of the domestic system outside of DFW losing money because AA is using higher cost RJs or using the capacity primarily to feed int’l flights (JFK and MIA)… while int’l flying is more valuable to the network, carriers get less revenue for carrying an int’l passenger to the gateway than they do with a profitable local passenger… AA loses money on JFK domestic because most of its network is competitive with low cost carriers and what they have left of domestic at JFK is to feed int’l passengers or maintain market share (the transcons which are being operated by high cost 762s which are not profitable against 757s and 320s operated by other carriers – AA’s average fares are just not high enough to cover the cost differential



True… the problem is the unions don’t understand what really is valuable to employees and aren’t wiling to prioritize what matters.
They are trying to defend defined benefit pension plans when they don’t really matter to most new hires..
They are trying to defend against outsourcing when most current employees want to make sure they are taken care of and see increases in wages..
Forget the outsourcing thing and just require that AA guarantee US based comparable pay jobs for all current AA mechanics and then let them do whatever they want with outsourcing….

 

[Tater Salad]

Please excuse my ignorance, as I'm new to this board, but if Regional service is so much higher, why is AE taking over ORD? The planes are alot cheaper, they pay their employees alot less, and they are more fuel efficient.

 

[Frank Szabo]

Please excuse my ignorance, as I'm new to this board, but if Regional service is so much higher, why is AE taking over ORD? The planes are alot cheaper, they pay their employees alot less, and they are more fuel efficient.

You've already answered your own question.

AA has no intention of "giving" its pilots anything but a substandard agreement. The use of Eaglet is the perfect way to say "Up Yours", even if it actually costs the company more.

 

[commavia]

You've already answered your own question.

AA has no intention of "giving" its pilots anything but a substandard agreement. The use of Eaglet is the perfect way to say "Up Yours", even if it actually costs the company more.

Well, again, I think the point is that AA simply wants to be competitive against the competitors it's up against, and the "competitor mix" that AA is up against these days is increasingly weighted towards competitors with lower employee costs - both pilots and non-pilots - than AA.

In 1980, AA's competitors were basically all other pre-deregulation legacy carriers. Those carriers cumulatively probably made up 90% of all airline capacity in the United States. As such, in virtually every market - not just nonstop, but connecting city-pairs - the pricing power was controlled, one way or another, by an airline with costs (including labor) that were relatively close to AA's.

Today, that is no longer the case - mainline network carriers today make up a much lower portion of overall U.S. airline capacity than they used to, which is why the straight comparison of labor costs between AA mainline and Delta mainline, United mainline, USAirways mainline, etc. is not irrelevant, but it becomes less and less relevant as time goes on. Those carriers are - or, more specifically, those carriers' cost levels - are, in many cases, no longer the ones setting the prices in these markets. In many markets today, prices are set by Frontier, or JetBlue, or by Mesaba, SkyWest, Mesa, etc.

And, needless to say, while we can debate AA's costs - labor and otherwise - versus other mainline U.S. legacy carriers, I don't think anyone here is honestly going to argue that AA's labor or non-labor costs, in general, are competitive with most low-fare, let alone regional, carriers.

 

[Frank Szabo]

Well, again, I think the point is that AA simply wants to be competitive against the competitors it's up against, and the "competitor mix" that AA is up against these days is increasingly weighted towards competitors with lower employee costs - both pilots and non-pilots - than AA.

The issue of "competition" went out the window long ago when Centrepork decided it would be better for their corporate bonus structure to "enlist" their pet union, the TWU, to scare the hell out of the rank and file and get us to vote for concessions, granting the company almost everything they desired with respect to give-backs. That was squndered, and here we are, right about here.

... snip

And, needless to say, while we can debate AA's costs - labor and otherwise - versus other mainline U.S. legacy carriers, I don't think anyone here is honestly going to argue that AA's labor or non-labor costs, in general, are competitive with most low-fare, let alone regional, carriers.

They lost my support when the documents were signed to allow the unions involved to look at the book to "prove they could" file for Chapter 11 protection.

If one would have bothered to read the US Code re: bankruptcy filiings, it would have been obvious there are no preconditions for doing so, making the charade an outright lie by both the company (which is to be expected) and the TWU (which we have the privilege of paying a couple hours salary a month to tell us the same lies we could get from the company for free). As the US Code reads, even a financially heathy company can file for Chapter 11, but God knows why one would.

Simply put - the company bought the union intending to cut a fat hog in the ass but things didn't quite work out the way they were planned for the boys in Centrepork. They missed their golden opportunity to do a "strategic" bankruptcy filing as was done as a matter of practice by airlines for so many years - Delta and Northworst were the last two to get under the wire in 2005 before the rules changed in October. Since then, no major airline has filed, probably because thew new rules will severely screw up the corporate bonus structure and associated games - one of the conditions being to get a huge failure bonus as was the practice previously, the exec has to show the judge a viable job offer, otherwise zip.

All the corporate machine needs do now is lose a sufficient amount of money by keeping their people angry (which they seem to excel at) then sell the company and collect a different kind of failure bonus not covered under the new bankruptcy rules.

This is not a matter of being "competitive", as you say - this is a matter of attempting to set a lowball wage and benefit structure for the airline industry's workers.

All you business boys out there - FRESH MEAT! - Tell me how wrong I am!!

 

[WorldTraveler]

the simple reason why AA is replacing mainline capacity at ORD is because they cannot profitably compete against other carriers in many ORD markets... while the RJ has higher UNIT costs (CASM) it does cost less PER FLIGHT... thus, AA can pick off the best revenue out of each market and generally keep it...(despite what people say, business travlers who are loyal to the US network airlines generally will put up w; regional jets unless it is completely all RJ against another carrier's all or majority mainline..... (the question was asked about where AA flies mainline against other carrier RJs but the other side is where AA flies RJ against other carrier mainline and a couple of key markets include LGA-ATL/DTW/MSP and ORD-ATL/SLC and in those markets AA gets less lower average fares and has a pretty small share - although most business passengers tolerate RJs, you can only push their use so far).

While AA says they haven't cut system capacity as much as other carriers, they have largely shifted it from ORD and JFK to MIA and DFW where AA has built larger hubs which also have less competition.

Frank,
you have it mostly right. Despite the moral supremacy that AApologists have about AA not filing for BK - and which AA mgmt uses as well - the simple fact is that AA fAAiled to take advantage of the cost savings they got from their bankruptcy threat concessions... then then decided not to grow the company so the labor CASM has gone through the roof...
AA employees had salary cuts just as large as other employees - you can look at compensation graphs to see that AA employees were not overpaid relative to their peers. What they have been is less productive because AA hasn't taken advantage of the cuts and concessions they receivedi n 2003... now they are trying to extricate themselves from the mismAAnagement of almost a decade ago.
You are absolutely correct that AA mgmt squandered the opportunity they were given... doesn't change the fact that they are still in a very dire position and with huge competitive handicaps... but to argue that AA didn't get the cuts (at least from employees) that other carriers did is just factually wrong.. AA mgmt just didn't take advantage of the cuts they got.

.
Sure there are other advantages that BK granted other carriers, but AA's balance sheet was in far better position even 5 years ago.. they didn't need the benefits other carriers needed out of BK... AA was capable of competing with formerly BK carriers...
.
now, AA has the highest debt levels in industry, the highest unit costs, and a workforce that has been kicked around while mgmt twiddled their thumbs waiting for something good to happen... problem is business is about going after the good stuff yourself, something AA mgmt did not do.
.
AA won't go bankrupt because it runs out of cash in the near future... and since they have a moral objection to filing for BK - which is indeed permissible because BK simply says that you cannot cover your debts with your current business model (true for most airlines), AMR will end up filing for BK when they truly exhaust their cash...and that may take years
but in the meantime AA's costs will remain as the industry's highest and AA's ability to compete will be further diminished the longer they wait to deal w the problem.
.
It is true to say that AA can't compete against anyone - mainline, regional, or low cost - and thus AA is going to continue to be the big target that other carriers will go after.... because AA is bloated, inefficient, and unable to defend its key markets... which explains why in the past year or more, AA's revenue growth has trailed the rest of the industry and will continue to do so because AA can't take out any more capacity without taking major portions of its network away.
.
what the other carriers did obtain through mergers, which AA has also shunned, is the increased size that makes it possible to get rid of less productive capacity.
.
the bottom line is that AA has been strategically out of sync w/ the industry for a decade- they chose not to file BK but then didn't use their benefits from their own restructuring, they didn't merge when others did so they could pull capacity, and then didn't and can't pull capacity because if they do, their network is very close to being unable to compete with larger carriers already.