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For most of your 30 years in the industry, fuel expenses consumed less than 10% of airline revenue. In recent years, fuel has jumped to as high as 35% of revenue, which is where it will end up in 2011 unless the price of refined products declines sharply in the fourth quarter. Arpey, Horton and the Board are gambling that fuel costs stay at 25% to 35% of revenue for the long-term and if they do, an order for hundreds of fuel efficient planes makes perfect sense, since the fuel savings and maintenance savings will make the payments on those new planes.
Sure, management is investing small sums in hopes that those investments help AA compete with other airlines that are also improving the customer experience. The trivial sums spent on improving the ready rooms and the landscaping? Wouldn't pay for a tenth of a percent raise for the employees. It's small potatoes. The $300 million you mentioned above has been debunked in other threads.
Your revenue estimates are very optimistic, probably to the tune of a billion dollars of unwarranted optimism. For the first six months, total revenues were just $11.65 billion, and there's no indication that AA will bring in more than that for the second half of the year. My prediction is total revenue of $23 billion for full-year 2011, not your optimisitc $24 billion. AMR will spend about $8 billion on fuel and about $7 billion on labor. Right there is $15 billion of the $23 billion in likely revenue. All other operating expenses including rent, landing fees, credit card discounts and commissions, depreciation and amortization, repairs and maintenance, catering expense and other expenses will total about $9 billion more, leading to a loss of about $1.0 billion. On top of that billion dollar operating loss, the interest on the debt will total at least another $800 million, for a full year net loss of $1.8 billion.
Happy Days are Here Again? A net loss of $5 million a day ain't good times.
About that depreciation and amortization expense that you usually deride as accounting voodoo - it doesn't represent cash spent in 2001 but it represents cash spent in prior years. $8 billion spent on fuel this year contributes to this year's net profit or loss as all is written off in the year it's used up. $3 billion spent on airplanes is written off over 30 years because the airplanes aren't used up in the first year, so each year AMR would write off $100 million of that $3 billion and do the same for 30 years. That doesn't make this year's depcreciation/amortization expense illegitimate - it just means that AA's cash balance didn't absorb that depreciation expense this year - as the cash was spent in prior years.
The primary problem? For years, airlines spent about 10% (or less) of their revenues on fuel. That percentage began to climb substantially about 10 years ago. Now that fuel costs consume more than a third of revenue, other line items have to be adjusted in order to pay for the fuel, and unfortunately for you and your colleagues, labor costs were an easy target in 2003.
Why not just increase ticket prices? Despite numerous well-publicized "fare hikes" this year and every other year, airlines have struggled to increase yields above their levels of 1999-2000. Airlines have closed some of the gap by increasing load factors and filling more seats (although sometimes with junk fares) and they have increased unit revenue some. Still, the average mainline yields need to be more like $0.18 or $0.20 per passenger mile but $0.14 or $0.15 seems to be as high as AA, DL, UA and US can increase them. People simply won't pay double the 1999-2000 fares to fly now.
About fuel again - I realize that gas prices have spiked and that's caused plenty of pain for families. But gas wasn't costing you 10% of your family's income in 1999 nor is it costing you 35% of your family income in 2011. Unfortunately, though, that's the airline reality - fuel now takes 35% of this year's revenue. Crude prices have collapesd but refined product prices have stayed at about $3/gal for jetA. In 1998 and 1999, AMR spent an average of $0.55/gal for fuel, and this year it will be about $3/gal. For nearly 2.7 billion gallons. This year's fuel bill at AMR will be about $6.5 billion higher than in 1999. Even if nothing else got more expensive, that means that revenue needs to be $6.5 billion higher than in 1999. And it won't be. You have been focused on comparing today's revenue to the dark days of 2002-03 when AMR was bleeding billions. Instead, compare the numbers to 1999 when AMR was moderately profitable and paying out profit sharing. Revenues simply haven't increased enough over 1999 levels to pay the fuel bill, the interest expense and all the other costs. Increasing employee expenses now? Lunacy.
Decent revenue per employee? Sure. Fuel costs per employee? Never, in the history of airlines, have fuel costs per employee been higher.
