AMR Faces Union Stalemate in Bid for $800 Million Labor Savings

[FWAAA]

FWAAA, I suspect using 2002 data is a bit skewed... That figure no doubt includes the TWA employees still on payroll, including MCIE and the STL hub, plus the ORF and STL call centers.

I was actually using average employee numbers for all of 2001, as published in the earnings release (not the annual report) in January, 2002. That number included 12,900 average fte TWA LLC employees during 2001. Using average employee numbers for 2000 (published in January 2001) of 93,400 shows a reduction of 30% from pre-TWA purchase mainline employee levels.

I'm not sure I understand why we'd exclude the TWA employees when calculating how much shrinkage has occured at AA, especailly since the fleet grew substantially and many of the planes continued in the AA fleet for several years following the concessions. The concessions required substantial headcount reductions and those occured during 2003, following large reductions in 2002. The airline was what it was in September 2001 and I don't see why we'd exclude a large portion of the employees on that date and then criticize AA for smaller percentage reductions in employees when AA let go of a large number of the workforce that was on the payroll in September, 2001.

In any event, mainline employee numbers are off by 38% from their peak, which was, of course, immediately prior to September 11, 2001. I assume that the other network competitors' employee numbers peaked in the summer of 2001 as well, as I don't recall furloughs until late in September of that year.

Since the network and fleet are more or less back where they were prior to TW, using data from Y2000 would probably give a more accurate view of things, but even that includes the last remaining vestiges of Reno and Business Express and the not-yet-neutered SJU hub.

AMR didnt' publish employee counts in the late 90's annual reports from what I recall (I don't see it in the Y2000 SEC filings), bur I'd estimate the airline is only down in size somewhere between 20 and 25% if you take the TWA bubble out of the picture.

Even if we pretend that the TWA asset purchase never happened, the mainline employee count is down 30% from the employee counts during 2000. I'm skeptical that UA let go of half of its mainline employees that it had in 2000, but I'm too lazy to audit those claims. The AA numbers can be found in the 8-Ks containing the year-end earnings press releases - definitely not in the 10-Ks.

 

[eolesen]

Thanks for the adjusted number.

Taking TW out of the calculation is in part to head off the "It's all TWA's fault" line of argument later, but also to try and show if there was real contraction, or just a bubble event. Bubbles can skew the statistics and distort the actual magnitude.

Yes, AA did keep some of the TW aircraft, but disposed of a bunch of legacy AA aircraft in return that they might have otherwise kept, i.e. the 75 aircraft in the F100 fleet, the 25 in the AB6 fleet, and I have no idea how many MD80s without diving too far into the filings.

My gut says on a fleet size basis, it's essentially a wash, and appears close to where they were prior to TWA, give or take a few growth aircraft orders already on the books.

 

[jimntx]

I'm not sure I understand why we'd exclude the TWA employees when calculating how much shrinkage has occured at AA, especailly since the fleet grew substantially and many of the planes continued in the AA fleet for several years following the concessions.

Many of the former TW planes continue in the fleet even today. If you board an MD-80 that has the F/C closet aft of the lav and immediately forward of 3A & 3B, it is a former TW a/c. They continue in the fleet because for the most part, "they have longer legs than the AA MD-80s." (Or, so I was told by a pilot. They are also newer a/c than the average AA MD-80.) We use them a lot on routes like DFW-SEA.

 

[WorldTraveler]

FWAAA,
you and E both note the difficulty in directly comparing some lower level statistics between carriers... including headcount. As you know, all of the US carriers have had different methods of reporting employee counts, in part because they have had wholly owned subsidiaries and have insourced and outsourced various amounts of their work. In addition to the public reports you mention, employee counts are reported to the DOT... although not a complete apples to apples comparision between DOT and SEC data, there are trends that can be seen.
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There have also been mergers which have skewed the statistics... all US carriers have engaged in mergers or significant asset acquisitions in the past decade or so....
the primary difference between the rest of the industry and AA is that AA acquired TW BEFORE the wave of restructuring in the industry and, even though, they discontinued much of the former TW operation, they did not get those costs out while at the same time have not grown the original "core" AA operation.
Even if you take the 38% number which includes the TW operation, AA's cuts are of about the same magnitude as DL's and a bit less than NW's.
The big difference between AA and all the other airlines - US/HP included - is that they cut before or during BK and then grew into their new size.... the growth part is what has been missing for AA - they have shuffled assets around but little growth has actually occurred. Thus, part of those other carriers' labor cost advantage comes from being able to hire lower paid employees (if only because new hire employees have lower benefit costs).
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Regardless of the precise numbers, the point of the discussion is to understand what it took for other carriers to turn around, figure out what has NOT happened at AA relative to those other carriers, and attempt to understand what AA MIGHT do as part of its turnaround.
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If AA obtained low enough costs, they could simply add alot of growth that would permit their costs to become comparable with other carriers.
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but in every case so far, the ability to grow is tied closely to getting some level of labor cost cuts in order to provide the "fuel" for lower cost growth. I still have not seen how AA's plan might do that - although they are betting heavily on increased efficiency coming from new aircraft.
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How AA's plan - which is largely dependent on the efficiencies that come from new aircraft which are several years away from beginning to arrive - will deliver the total cost reductions and increased revenue which is also needed remains to be seen. When you consider that other carriers are reducing their costs through their own aircraft purchases, it becomes less clear how AA will gain an advantage.

 

[FrequentFlierCA]

So at this point, with the bankruptcy word swirling around again and a very weak economy on the horizon, I have to ask: Isn't it better to get back some of what you gave up in 2003? Is it worth going for "restore and more" if it lands the company in Chapter 11 and gets you a new concessionary contract?

 

[nbmcg01]

So at this point, with the bankruptcy word swirling around again and a very weak economy on the horizon, I have to ask: Isn't it better to get back some of what you gave up in 2003? Is it worth going for "restore and more" if it lands the company in Chapter 11 and gets you a new concessionary contract?

Unless Sr. Mangt. takes a substantial cut in pay and benefits and loses the bonus plan you will not see union buy in to any more concessions. And that means no changing titles to offset pay cuts. You cannot downsize to profitablity.

 

[Super FLUF]

So at this point, with the bankruptcy word swirling around again and a very weak economy on the horizon, I have to ask: Isn't it better to get back some of what you gave up in 2003? Is it worth going for "restore and more" if it lands the company in Chapter 11 and gets you a new concessionary contract?

I can't speak for any other work groups, but if the financials the company is currently vetting are accurate, then every pilot at AA could work for FREE and it wouldn't make a hill of beans.

As far as I am concerned, any concessions only prolong keeping the current regime in power. I'm not going to continue to subsidize incompetence. Taking a pay cut will be worth it if we get a new management team in place that knows how to run an airline, and wants to run an airline.

The mismanagement of this airline is breathtaking.

 

[damajagua]

I can't speak for any other work groups, but if the financials the company is currently vetting are accurate, then every pilot at AA could work for FREE and it wouldn't make a hill of beans.

As far as I am concerned, any concessions only prolong keeping the current regime in power. I'm not going to continue to subsidize incompetence. Taking a pay cut will be worth it if we get a new management team in place that knows how to run an airline, and wants to run an airline.

The mismanagement of this airline is breathtaking.

That pretty much sums up the sentiment of most AA employees.
The current management has lost all credibility with the front
line employees and it obvious it has lost it with the finacial community
as well. It's time for the board of directors to wake up and fire
all these losers.

 

[eolesen]

If the current management team had lost the respect of the financial community, they would be gone. The equities analysts are fed up, but they're only concerned with the stock price and the company's ability to return value in the terms of a higher stock price.

The fact that they still are able to roll out EETC's and refinance existing debt says that the bankers are far from the point of calling for anyone's removal, since they keep loaning them more money.

The last time I can think of where a union successfully called for the head of a CEO was at Eastern. And y'all know how well that changeover went.

I do agree with Nancy, though. The only way there's going to see any motion outside of a court supervised restructuring is for the executives to make the first move and take some massive cuts in salary, i.e. down to the $300's for the C levels, no more than $200K at the VP level, maybe $150K at the director level. I'm not too worried about them having stock options to make up the perceived difference, since that would mean the company has to actually perform for that to be of any future value to them.

Sure, a few up & comers might bail for more money elsewhere, but I seriously doubt too many in total would leave just from a compensation change.

What too many people fail to recognize is that there aren't too many people in the operational or financial management structure with less than 20 real years of service at AMR. They're airline people by career whether you want to admit it or not. Questioning their commitment to running an airline is nothing more than a red herring. They've all had the chance to chase higher pay elsewhere (the good ol' boy network can land you a new job in just a few hours, no?), yet they stick around year after year.

 

[737823]

I do agree with Nancy, though. The only way there's going to see any motion outside of a court supervised restructuring is for the executives to make the first move and take some massive cuts in salary, i.e. down to the $300's for the C levels, no more than $200K at the VP level, maybe $150K at the director level. I'm not too worried about them having stock options to make up the perceived difference, since that would mean the company has to actually perform for that to be of any future value to them.

If AMR is having difficulty attracting and maintaining quality talent in senior management at current compensation levels what makes think slashing their salaries will help matters?

Josh

 

[Birdman]

If AMR is having difficulty attracting and maintaining quality talent in senior management at current compensation levels what makes think slashing their salaries will help matters?

Josh

So your solution is to keep rewarding substandard performance at current rates of pay since there's just no one who can do a better job available? Whatever happenened to stealing talent at a higher rate of pay? Might be a wise investment.

 

[nbmcg01]

If AMR is having difficulty attracting and maintaining quality talent in senior management at current compensation levels what makes think slashing their salaries will help matters?

Josh

Seriously Josh, lol. The airline industry is known as the ultimate "good old boys club". If they don't work at AA then they'll get a similar job at another airline. Women usually get the Flight Service and maybe Diversity or other customer service type executive positions BUT never the real hard hitting CEO, COO, CFO or even head of Legal positions. It is still "girls" in the back of the plane mentality. Clean house and get some b*** busting women in top positions to deal with this mess and quit talking about how good the current "talent" is... (speaking re: f/as but probably for all groups) You can have cost saving contracts without everyone feeling as if they've been hosed. Quit worrying about what Yada Hooda and Fitz are doing and work with what YOUR employees need/expect. There are many cost neutral/no cost qaulity of life enhancements that could be negotiated if everyone would quit playing games. Don't expect blood for a no cost item just because it may make life better. Scheduling: There should have been a team of schedulers and real flying f/as (no the typical kiss a**es that live on special assignment) that sat down and discussed the needs of both groups on how to address true service barriers. get rid of all of the archaic tradng rules. Who should care who works a given flt. as long as it is covered. Red light green light..in 2011? Get everyone qualified on ALL equipment. The actuall CBA should be about 1/3 the size of the current book. AA needs to let their workforce grow up and relinguish the "I need to control you attitude" and the AA f/as need to show that they can be adults and stop the games. I firmly believe if there was more schedule flexibility they would see the need for reserves drop and payroll for being off schedule would go down tremendously.

 

[WorldTraveler]

AMR continues to issue debt because it can - not because there is any "support" from the financial community. AMR's credit default swaps are at the highest level among large airlines, its market cap is a fraction of the level of its peers, and the stock continues to be shorted at levels 4-5X levels seen at DAL, LUV, and UAL - and its credit rating is lower than its peers w/ the possibility of being lowered further.
AMR continues to issue debt because it has assets which secure that debt - and because just about every corporation can continue to issue debt until it is in BK. After several years of making headway in reducing its debt levels, AMR is now refinancing all of its debt as it comes due and now has every foreseeable unleveraged asset mortgaged.
AA is clearly hoping that the economy will turn around long enough for the cash burn to stop, biding time until the new aircraft arrive which will allow for dramatic cost cuts, even if it further increases long-term indebtedness.
As long as AMR can continue to refinance its debt between now and 2013-2014, it probably can stay out of BK but given that it continues to take on debt while its peers reduce their indebtedness makes AMR's position all the more precarious long term relative to its peers.
The notion that AMR's costs after the new aircraft arrive will be much lower than its peers only matters if AA still has pricing control in its key markets; other carriers will operate with less fuel efficient aircraft and a fleet that will require more maintenance but they could well be the ones who price AA's key markets because of their larger size or lower cost structure.
The 3rd quarter ended this weekend and we will see in a couple weeks how much effect competitors have had in preventing AMR from obtaining industry comparable revenue. AA has said it expects RASM growth to be at levels comparable to its network peers; if that turns out to be the case, it will give AA a little breathing room. While int'l market growth has been strong despite the weak economy, competitor incursion in AA markets remains strong. AA's introduction of PEK service with its bad slot times has now lapped year over year and PVG is a much stronger market being operated w/ good slot times to/from LAX.
How the competitive situation will play out in the next two years will shape how well AA can restructure. In addition to the slot deal and Wright Amendment as challenges that unique effect AA, TAM-LAN's decision about an alliance partner has enormous consequences for AA. AA badly needs LAN-TAM in oneworld to help it maintain its dominance in the only global region it dominates but it is precisely the size of the combined entity - ATI/JV - or not that will be particuarly worrisome to regulators, esp. to/from Brazil, the largest market in the region. It is very likely that even if regulators approve AA/LAN-TAM, there will be carveouts or slot divestitures given that AA/JJ operate more than 60% of the slots and capacity between the US and Brazil, including at GRU where there is little actual capacity growth expected in the years ahead and every country in the world wants some of it ... a situation not much different from LHR where the price of ATI/JV allowed competitors to gain signficant footholds. LAN/TAM may decide it is simply not worth it and opt for Star/UA.
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With little near-term reduction in AA's costs and the potential for significanly more revenue incursion - and the potential loss of AA's key strategic network advantages - coupled with few unmortgaged assets and debt levels already well above industry average, the only viable way to turn AA around is to implement massive pay cuts - a move that could well result in even further damage to the company.
Against that backdrop, mgmt may well have decided it is not worth risking the ire of labor given it has little ability to withstand labor backlash and labor may have decided it is not worth agreeing to take cuts that will likely never be returned and at best may only prolong by a short time when AA inevitably has to deal with its debt levels.

 

[eolesen]

Women usually get the Flight Service and maybe Diversity or other customer service type executive positions BUT never the real hard hitting CEO, COO, CFO or even head of Legal positions.

Gee, I know AA's backward thinking, but they've had women in the past as CIO (Kathy Misunas), Chief Legal Counsel (Anne McNamara), and currently, as CFO (Bella Goren)....

You also left out the other "softball" positions, which are head of HR. AA's had women in that position as well -- Sue Oliver (who also headed Labor Relations) during the 90's, and Delores Wallace (who rose up from the FA ranks into management) during the early 80's.

Josh, I'm not sure AMR has had any problems attracting talent. They just haven't had anyone leave in a while to make room for new talent. There are a lot of folks just down the road in Houston who like what they do, and don't want to move their families to Illinois... Compared to Crook County and the surrounding areas, income tax free Texas is well worth a slightly smaller W-2...

Contrary to the opinion of some here, I also still think AMR has a pretty deep bench of capable people to pull from internally. I'd rather have someone who knows what not to try twice (or three times) than to get some whiz kid who plans to boil the ocean their third week on the job and try to make a name for themselves.

 

[Frank Szabo]

... snip

Contrary to the opinion of some here, I also still think AMR has a pretty deep bench of capable people to pull from internally. I'd rather have someone who knows what not to try twice (or three times) than to get some whiz kid who plans to boil the ocean their third week on the job and try to make a name for themselves.

Sir E, YOU are the one who originally mentioned the inbreeding (indeed) of AMR's "management". That's probably why we have the "Which way did he go, George" syndrome going on now. Present management can't - period.

Get people in from outside and let them work over the company without any upfront orders from the board excepting, of course, "Make It Work". Many inernal problems would be solved if there were no alliances to uphold and empires to protect.

Run the company as a business designed to make money and tell the twu to go to hell - what a concept - not possible on this group of management's watch.