Aa's Purchase Of Twa

[mweiss]

I don't mean to be schoolmarmish about that first sentence. It's just that there's been so much confusion generated from that sentence ("How can there be too much capacity? I'm a FA and all of my flights have been oversold for weeks!), that I feel compelled to do everything I can to eliminate the confusion.

The second sentence is, I will grant, an overgeneralization. To be precise about it, the legacy carriers have traditionally used the business mode to set the overall number of available seats in the fleet. Since business travel is much more time sensitive, this left a lot of otherwise unused capacity, the costs of which were somewhat mitigated by selling leisure tickets.

It works adequately in good economic times, and disastrously in bad economic times.

The only reason I mention the length of time is that the effects of both types of economic conditions have long been well known. It's just that the legacies haven't done anything to address them, despite having plenty of time to do so. This begs the question of why.

 

[seed]

Once TWA went C7 then whoever wanted the gates could have bid for them.

[post="243686"][/post]​

TWA went C7 as part of the deal w/AA, if I'm wrong here I apologize, but I believe it was to shed some debt prior to the purchase.

 

[kirkpatrick]

There's far too much capacity. I don't care how it is reduced, but it needs to be reduced.

[post="244143"][/post]​

I don't see why there's too much capacity when the planes are averaging 80% full. If I sell all my hamburgers, I don't have too many hamburgers even if I sell them below cost. What I have is costs that are too high.

That's the problem. Cutting capacity might briefly change the ratio of high yield seats sold to low yield, but it wouldn't solve the problem itself, which is a bunch of new airlines which are able to produce seat miles more cheaply than the legacy carriers. So the possible solutions are: entice people to pay more for our higher cost seats, or do something to bring our costs in line with SW and JB.

I can tell you right now which scenario is more likely.

MK

 

[eolesen]

To the extent that AA does need to add some capacity, that would be simple.  How many thousand AA pilots are on furlough?  AA's got some MD-80s in the desert, along with the "permanently retired" 762s.  AA could pick up some UA 762s and 763s to quickly add some capacity.  Within weeks, nobody would miss UAL.

[post="244104"][/post]​

Sounds great, but not practical. Bringing back the pilots on furlough requires a lot of re-training...

Also, from a maintenance perspective, UAL's 767 fleet may as well be A330's or 777s... Their -200s are JT9D powered, and their -300 fleet is PW4000 powered. AA's 767 fleet is CF6-80 powered.

It's also not as easy to bring back to life some of those "permanently retired" aircraft. Five of the 762's are already sold for conversion to freighters, and others (including MD80's) with a resale value lower than the component value will end up being parted out.

 

[Boomer]

If it were still 1998-2000, I'd be inclined to agree with you.

Who cares about their fleets? There's hundreds of airplanes in the desert, and nobody is flocking to lease them. Airbus is not cranking out A320s at maximum capacity - anybody who wants some can get them. 737 production has slowed to less than half of Boeing's capacity.

The inevitable shutdown of USAir and UAL does not necessarily mean that AA needs to add hundreds of flights to benefit: AA could benefit simply by cherry-picking some of the top-yielding customers and placing them on AA's existing flights.

AA's flights are already full, you say? Then AA could afford to be a little more discriminating as to customers. If AA could add 5% or 10% more at the top of the yield curve, it could jetison the bottom 5% or 10%. That alone would work wonders.

Think of each legacy airlines' pax as a spectrum. Each airline has some (too few, to be sure) pax paying high fares. And each one has too many pax paying too little. A shutdown at UAL would enable AA to try to attract some of UAL's higher yielding pax and would allow AA to leave behind some of the lowest-yielding pax.

Here's what I see happening when UAL shuts down. AA would own ORD the way it owns DFW and the way DL owns ATL. Sure, some LCCs would move into ORD. But so what? The UAL pax who pay more than 5 cents/mile would gravitate toward AA. At least some of them would.

AA doesn't have any cash? Have you seen the $3 billion of unrestricted cash? That cash can be used to bid on UAL's overseas routes. WN and B6 won't be in a position to do that. Other bidders will include CO, DL and NW.

To the extent that AA does need to add some capacity, that would be simple. How many thousand AA pilots are on furlough? AA's got some MD-80s in the desert, along with the "permanently retired" 762s. AA could pick up some UA 762s and 763s to quickly add some capacity. Within weeks, nobody would miss UAL.

You're right - the LCCs would pounce. But UAL and USAir still fly SOME pax who pay high fares. And their shutdown would mean those pax would be up for grabs. Think they would all gravitate toward WN or B6? If so, then YOU are the one who is high.

Would a shutdown at UAL and USAir solve AA's problems forever? NO. Will AA survive if UAL and USAir are kept on life support forever? NO.

But a shutdown of those airlines will buy the remaining survivors some breathing room to keep up their transformations into long-term survivors.

There's no competitive need for 6 different legacy airlines to fly pax from SAN to LGA. Or between any other city pairs.

[post="244104"][/post]​

--------------------------------------------------------------------
FWAAA,
My point has never been that AA is oversold and therefor commands a premium.

My point is that AA sold the Unions and the financial community, "without further ratification", on a farce being AA could command a thirty percent revenue premium to the LCCs.

The head of ECLAT was quoted as stating, during a PBB interview following the without further ratification, ratification: "while the AA brand could command a revenue premium, he being the head of ECLAT, doubted that it would nearly be thirty precent.

This is the same guy upon whom constructive reliance was made to ratify an agreement, "without further ratification."

The Legacy Carriers have lost pricing power over routes in which they compete with the LCCs. Dropping price to preserve market share is good only as long as you have the financial wherewithal to stay the course.

At the point that one begins, "burning the furniture," to keep the fires going; pressing considerations with regard to longevity begin to surface. It is the penchant of AMR to pursue Donner party alternatives which focuses my attention.

With regard to planes built versus planes ordered: everyone that has ever purchased a car knows that during the vast majority of transactions you can get a better deal on a car already paid for on the dealer lot than one you order. Anything on the dealers lot represents someones cash that has already been paid. Better yet, the car that has not been paid for, but repossesed, sitting as an uncollectible debt for which the bank is willing to settle for a deal netting them anything close to what they have in it.

Oil at $50/bbl' the lack of hedges going forward and the Saudis stating that the price would remain relatively firm, coupled with the lack of pricing power and the ability of the LCCs to quickly respond to potential failures of either/both U/UAL, do not inspire me to bet the ranch.

On the flip side, if AMR were to respond to a U/UAL failure and bet big on assets from UAL or U, recognizing that such a bet would place heavy committments on unencumbered cash: doesn't that mitigate towards another round of concessions or an attempt to escape the future cash committments required to fully fund the pension plans?

 

[mweiss]

I don't see why there's too much capacity when the planes are averaging 80% full. If I sell all my hamburgers, I don't have too many hamburgers even if I sell them below cost.

See? That's exactly what I was talking about. 🙄 Look, when someone in finance talks about too much capacity, they're referring to profitable capacity.

What I have is costs that are too high.

That's one way of looking at it, but hardly the only way.

Cutting capacity might briefly change the ratio of high yield seats sold to low yield, but it wouldn't solve the problem itself, which is a bunch of new airlines which are able to produce seat miles more cheaply than the legacy carriers.

This is all very true. However, cutting capacity provides an opportunity to extract profitable rents in the interim, while retooling the company to have lower costs. It's a much happier path than having to do it under duress.

So the possible solutions are: entice people to pay more for our higher cost seats, or do something to bring our costs in line with SW and JB.

Or some combination of the two, which brings us to...

The head of ECLAT was quoted as stating, during a PBB interview following the without further ratification, ratification: "while the AA brand could command a revenue premium, he being the head of ECLAT, doubted that it would nearly be thirty precent.

This is the key. Surely there are other price points for travelers. Offer something extra, and charge a premium in line with the extra offering. Midwest Express did that; their biggest handicap was a lack of a sufficient network. Imagine if CO decided to do what Midwest Express did.

 

[Winglet]

Sure passengers like the premium stuff . . . MRTC, etc. The only problem is they think that should be free.

The problem is way too much capacity. Seats are not going to get more expensive until customers have to COMPETE for them.

 

[Oneflyer]

This is the key. Surely there are other price points for travelers. Offer something extra, and charge a premium in line with the extra offering. Midwest Express did that; their biggest handicap was a lack of a sufficient network. Imagine if CO decided to do what Midwest Express did.

In AA's case, it is difficult to offer a premium product while also offering the most product. In no other industry does the premium producer, also sell the most product.

 

[aafsc]

Sure passengers like the premium stuff . . . MRTC, etc. The only problem is they think that should be free.

The problem is way too much capacity. Seats are not going to get more expensive until customers have to COMPETE for them.

[post="245013"][/post]​

Another one of Carty's big mistakes, remove seats in order to give more room to passengers(thus increasing costs) while people are only willing to pay Southwest ticket prices; thus flying the fleet around for 4 years at a cost higher than our competitors. Arpey is doing the right thing by putting the seats back in. If they don't want to pay for more room then they will not get more room!

 

[goingboeing]

Another one of Carty's big mistakes, remove seats in order to give more room to passengers(thus increasing costs) while people are only willing to pay Southwest ticket prices; thus flying the fleet around for 4 years at a cost higher than our competitors. Arpey is doing the right thing by putting the seats back in. If they don't want to pay for more room then they will not get more room!

[post="245019"][/post]​

It is probably not a bad idea to reinstall seats on our a/c. Just so readers of this forum know,It is costing us a lot of money AGAIN to add the seats because we are installing NEW SEATS AND PSU'S.No one seems to know where all the original seats and PSU'S went that we removed in the year 2000.I worked the original "more room throughout coach" [MD80-B737-A-300] in the year 2000 and also the "Project Sardine" on B-757's in Jan-Feb 2004.We also had to use new seats and PSU's on that project.
The decision of Don Carty is still costing us a lot of money because we have wound up paying twice for the seat experiment on the AA fleet.

 

[mweiss]

Sure passengers like the premium stuff . . . MRTC, etc. The only problem is they think that should be free.

That's a gross oversimplification. Plenty of people are willing to pay more to have more room...at issue is how much more. If it's not enough to pay the extra "rent" for the additional square inches of space, then it's not worth keeping.

 

[eolesen]

It is probably not a bad idea to reinstall seats on our a/c. Just so readers of this forum know,It is costing us a lot of money AGAIN to add the seats because we are installing NEW SEATS AND PSU'S.No one seems to know where all the original seats and PSU'S went that we removed in the year 2000.

[post="245046"][/post]​

IIRC, the seats and PSU's were sold. Agree that we're paying twice for some items and for labor, but I don't know that I'd go so far as to say it was a total bust. Conventional wisdom says it was at least break even to revenue positive when the business travel market was stronger. Just not revenue positive enough in today's environment.

 

[MCI transplant]

IIRC, the seats and PSU's were sold. Agree that we're paying twice for some items and for labor, but I don't know that I'd go so far as to say it was a total bust. Conventional wisdom says it was at least break even to revenue positive when the business travel market was stronger. Just not revenue positive enough in today's environment.

[post="245288"][/post]​

<_< It seems TWA went through the same thinking when we reistalled seats back into coach, with our "Comfort Class" seating! So is there anything new under the sun? 😉

 

[jimntx]

TWA went C7 as part of the deal w/AA, if I'm wrong here I apologize, but I believe it was to shed some debt prior to the purchase.

[post="244255"][/post]​

Seed, don't bother with trying to introduce facts into this argument. The people who find comfort in blaming all of AA's problems on the TWA purchase develop a brain block on the point you just raised.

They just keep repeating the mantra "TWA was in bankruptcy"; "TWA was in bankruptcy." The fact that is isn't true--that TWA went into bk at AMR's insistence as part of the deal--is of no import to them. If they don't say it, a lot of their argument goes down the drain.

On those moments that you can break through to them, they become seers of the future. They then say, "Well, it was just a matter of time. TWA was going to go into Ch. 7 in a very short time." Note, these are the same people who 3 months ago were saying with no equivocation, "US Airways will be gone by Christmas/01JAN/15JAN/pick a date."

Their minds are made up. Do not attempt to confuse them with facts! You have been warned.

 

[Hopeful]

I don't think anyone here is blaming AA's problem TOTALLY on the TWA purchase. But purchasing another carrier as the economy and industry was going into a tailspin did not help AA's finances.

Keep in mind that before AA purchased TWA, AA was in a very strong financial position.I doubt very much TWA would have survived on its own if AA nearly filed for bankruptcy. Delta? NWA? TWA was no different. They would have either filed for another bankruptcy or seek a another carrier to merge with.