AMR May Still File for Bankruptcy

[sfb]

Er, isn't it obvious that cancelling the AAdvantage program would be suicidal. It's the largest airline loyalty program and many passengers book on American (as opposed to its competitors) precisely because they are trying to accumulate miles/achieve status. Remember the furor when US Airways announced that discounted tickets would no longer qualify towards preferred status? Or the griping over Delta's changes to SkyMiles? I suspect that discontinuing AAdvantage would lose American that $1.2 billion in passenger revenue in just one quarter, let alone the ongoing repercussions. Not to mention the loss of a very profitable revenue stream from selling miles.

Marketing is still necessary, even in a world where decisions are price-driven. After all, when a consumer is making a choice between similarly-priced alternatives, you'd like them to choose your product. And having your company's name on sports arenas is a good way to get it mentioned even in contexts which aren't explicitly marketing -- like in the middle of a TV sports report or a newspaper article.

Low utilization of airplanes is bad, but it's not as bad as flying capacity which you simply cannot fill enough to make back your variable costs. The cost of owning/leasing an airframe is peanuts compared to the cost of operating it. When you actually fly that airplane with passengers on it, you end up paying labor, fuel, maintenance, commissions/booking/credit card fees, food service, and landing fees. Taking those all together from AA's 1Q03 financials (counting half of "other rentals and landing fees), variable costs work out to nearly 73% of AA's operating costs. If AA can't make back 75% of its total costs (including depreciation, aircraft rent, and "other") on a flight, they *should* keep the plane on the ground, since it would lose more money flying.

 

[FWAAA]

Well, yes - it''s obvious to me that cancelling the AAdvantage program would be suicide - Mr Owen''s failure to realize that fact (not an opinion, but a fact, IMO), helped precipitate my outlandishly sarcastic reply to him. In my view, someone so out of touch with reality should be required to attend some corporate education sessions.

Otherwise, is his next post going to detail the cost savings (in his mind) of eliminating seat belts (or seats?) from the aircraft??

Why not just suggest that pax bring their own jet fuel to the airport??

 

[Bob Owens]

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On 5/15/2003 9:24:14 PM FWAAA wrote:

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2. AA could walk away from some airplane leases if it filed Ch11. But along with that benefit comes a cost. For UAL it was $248 million in the first quarter of 2003.
That''s a lot of money that AA does not need to spend, since concessions have been wrung from everyone without bankruptcy.

OK so UAL spent $248 on BK, but how much did they save?

What about the bookaway that inevitably occurs with a bankruptcy filing? Wouldn''t that hurt revenue? But then again, nobody in management at AA is smart enough to think that all the way through, are they?

What "book away"? If that was the case then why didnt AA see increased revenue when UAL went BK? Do you really think that anyone would be alarmed at this point and not book on AA if they went C-11? Didnt they pass a law that said that other carriers have to honor tickets from from a carrier that went C-7? Nice try.

Did you see how much better AA''s Q1 yield was than UAL? If I recall, it was nearly two whole cents per mile better. Why be in such a rush to join them?

Could that be because UAL has a lot of business in ASIA which has been especially hard hit because of SARS?

3. Why would AA cancel the AAdvantage program?? Mr Owens, are you aware that Citibank is AA''s best customer?? Last year Citi bought nearly $900 million worth of AAdvantage miles - used to fill otherwise empty seats (if even used at all). Or used to upgrade to higher classes (when the traveler has no means of paying full J or F). It was probably this comment that caused my sarcastic and caustic response. Again, I''m sorry. But why on earth would you have AA walk away from nearly $900 million in annual revenue (especially revenue that entails almost ZERO in marginal expense)??? Are you on crack?

Well if $900 million in revenue generates $1.2 billion in liabilities (from 10K filing) then maybe its not such a good deal.

Have you ever spoken to someone who spends $20,000+ per year on AA (other than me, that is)?? If so, you might spend your lunch hours trying to find additional buyers for AA miles instead of harboring such ludicrous thoughts.

Well you are corresponding with someone who was just forced to give up $20,000 to AA for nothing in return.

4. Construction is on again at the new JFK terminal because it is funded almost entirely with tax free bonds issued by the Port Authority. What this means is that others are financing the bonds in exchange for future rent payments by AA. In other words, it ain''t costing AA very much dough right now to build it. It will cost in the future (when, hopefully, AA is cashflow positive rather than cashflow negative) but AA will be eating other carriers'' lunch at JFK and will be able to afford it.

No AA will be eating its employees lunch. We did not need this terminal. I think that you are wrong about who is paying for the terminal. The Port may be providing the financing but I think AA has to pay the cost of constructing it, in addition to the rent to the port authority for the land, and after a set amount of time the Port becomes the sole owner of the building.

5. Advertising expenses. AA''s ad budget has dropped each year since 2000. AA is spending much less than WN per pax. Why should AA cut advertising further? Would a cut in advertising increase revenue? I keep hearing from the organized workforce in this forum that revenue needs to grow as well as costs reigned in. Since advertising is one area that might actually enhance revenue, maybe AA should spend more??

How effective is advertising by having your name on a Sports Arena? I would say that name recognition is not a problem for AA. Such forms of advertising is a waste.
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[Bob Owens]

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On 5/15/2003 9:27:13 PM eolesen wrote:
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It is a good thing we didn't pull our name off the arena. Millions of viewers saw the name "American Airlines" during the NBA playoffs this week, and if the Mavs keep winning, a few million more people will see it as well.

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Gee. I bet that none of those Millions ever heard of AA before and now that they saw the Logo on TV they are going to want to book on AA.

Come on, get real. They go to the computer and look for the lowest price or the most convenient schedule.

Why doesnt SWA need to have their name on sports arenas?​

 

[FWAAA]

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On 5/16/2003 711 PM Bob Owens wrote:

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On 5/15/2003 9:24:14 PM FWAAA wrote:

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2.  AA could walk away from some airplane leases if it filed Ch11.  But along with that benefit comes a cost. For UAL it was $248 million in the first quarter of 2003. 
That''s a lot of money that AA does not need to spend, since concessions have been wrung from everyone without bankruptcy.

OK so UAL spent $248 on BK, but how much did they save?

What about the bookaway that inevitably occurs with a bankruptcy filing?  Wouldn''t that hurt revenue?  But then again, nobody in management at AA is smart enough to think that all the way through, are they?

What "book away"? If that was the case then why didnt AA see increased revenue when UAL went BK? Do you really think that anyone would be alarmed at this point and not book on AA if they went C-11? Didnt they pass a law that said that other carriers have to honor tickets from from a carrier that went C-7?  Nice try.

Did you see how much better AA''s Q1 yield was than UAL?  If I recall, it was nearly two whole cents per mile better.  Why be in such a rush to join them?

Could that be because UAL has a lot of business in ASIA which has been especially hard hit because of SARS?

3.  Why would AA cancel the AAdvantage program??  Mr Owens, are you aware that Citibank is AA''s best customer??  Last year Citi bought nearly $900 million worth of AAdvantage miles - used to fill otherwise empty seats (if even used at all).  Or used to upgrade to higher classes (when the traveler has no means of paying full J or F).  It was probably this comment that caused my sarcastic and caustic response.  Again, I''m sorry.  But why on earth would you have AA walk away from nearly $900 million in annual revenue (especially revenue that entails almost ZERO in marginal expense)???  Are you on crack?

Well if $900 million in revenue generates $1.2 billion in liabilities (from 10K filing) then maybe its not such a good deal.

Have you ever spoken to someone who spends $20,000+ per year on AA (other than me, that is)??  If so, you might spend your lunch hours trying to find additional buyers for AA miles instead of harboring such ludicrous thoughts. 

Well you are corresponding with someone who was just forced to give up $20,000 to AA for nothing in return.

4.  Construction is on again at the new JFK terminal because it is funded almost entirely with tax free bonds issued by the Port Authority.  What this means is that others are financing the bonds in exchange for future rent payments by AA.  In other words, it ain''t costing AA very much dough right now to build it.  It will cost in the future (when, hopefully, AA is cashflow positive rather than cashflow negative) but AA will be eating other carriers'' lunch at JFK and will be able to afford it.

No AA will be eating its employees lunch. We did not need this terminal. I think that you are wrong about who is paying for the terminal. The Port may be providing the financing but I think AA has to pay the cost of constructing it, in addition to the rent to the port authority for the land, and after a set amount of time the Port becomes the sole owner of the building.

5.  Advertising expenses.  AA''s ad budget has dropped each year since 2000.  AA is spending much less than WN per pax.  Why should AA cut advertising further?  Would a cut in advertising increase revenue?  I keep hearing from the organized workforce in this forum that revenue needs to grow as well as costs reigned in.  Since advertising is one area that might actually enhance revenue, maybe AA should spend more?? 
 
How effective is advertising by having your name on a Sports Arena? I would say that name recognition is not a problem for AA. Such forms of advertising is a waste.
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UAL took a charge of $248 million for just Q1. I expect another large charge on June 30. And maybe another on September 30. I doubt they saved that much on airplane leases. Remember, most of the savings will come from the UAL employees. Why join them?

Maybe there was no bookaway. Maybe it was all due to SARS. Well, UAL''s pax revenue fell by 7.6% in Q1, compared to AMR''s drop of only 2.6%. Since every airline''s revenue is falling, looks like AA''s fell less than UAL''s. Maybe you''re right - maybe it was all SARS and war fears.

I apologize - Citibank only buys about $750 million per year, the other partners buy the rest, for a total of just under $900 million.

Do you know the difference between annual income/expense items and balance sheet items? Because your statement about AAdvantage not being a good deal leads me to think yo have no idea.

You do realize that AA sells miles each year for hundreds of millions of dollars (and gives away tons of them for flying on its planes), yet the total accumulated liability is only $1.2 billion?? That''s not an annual liability, it''s the total liability. AAdvantage pays for itself many times over. Even if it doesn''t work as a loyalty builder - it (unlike the rest of the airline) is cash flow positive.

You didn''t give up $20k and get Nothing in return - you got a chance to keep making topped-out pay (albeit, a bunch less than before) without having to endure the harsh reality of even greater pay cuts in bankruptcy. Plus, it means that for now, you may not have to start over at the bottom of some other airline''s seniority list.

Besides - you were more than willing to share in the good times - why not the bad? I know why: the compensation of organized labor must always be a one-way street. Was this written on a stone tablet a long time ago?

Carty tried to fix things without demanding pay cuts early on. Too bad for him. Damned if he did and damned if he didn''t.

On JFK - I am not incorrect. The current construction is costing AA almost nothing out of pocket - the bond proceeds are paying nearly every dime to build the place. AA will eventually pay for the construction thru rent to the PA. But for now - don''t worry - it ain''t costing AA very much cash. Think of it as a 100% LTV mortgage loan.

On advertising - WN has yet to name an arena or stadium after itself. AA pays about $8.6 million combined, per year, for the Dallas and Miami arenas. But it doesn''t stop WN from spending more than 3 times as much on advertising as AA, as a percentage of revenue. In 2002, AA spent $161 million on advertising (including the stupid arenas) and had revenue of $17.299 billion. AA''s ad budget fell 20% from the $202 million spent in 2001 and nearly 24% from the $221 million spent in 2000.

WN, on the other hand, spent $156.4 million on advertising in 2002 but only had $5.521 billion of revenue - less than one third as much as AA. As a fairly substantial shareholder of WN - I''m pissed. Thanks for pointing out Southwest''s spendthrift habits. Compared to AA, WN is spending like a drunken sailor on ads. And even though WN''s revenues have fallen since 2000, their ad budget has risen by 10%.

So WN gives its pax almost no food, yet spends as much on advertising (as a percentage of revenue) as AA spends on food and beverage. What the hell?? That is outlandish waste of money!! I''m writing to WN tomorrow to voice my displeasure. Thanks for pointing this out to me.

WN advertises extensively at ball games and on TV during ball games. Aren''t they the official airline of the NFL? They are the official airline of every baseball team save the Braves. And those ads are apparently costing a bunch. And those ads aren''t even causing revenue to increase: WN''s revenue was down in 2002 and 2001 from 2000 levels.

Anyway, do you have any data supporting your view that AA''s arena naming rights are a complete waste of money, or is it just your personal view? Anyway - I agree with you. I wish that AA hadn''t signed expensive arena naming rights deals either. But I don''t see filing bankruptcy over a piddly $8.6 million per year. It''s possible that AA negotiated a reduction in the naming rights payments anyway. Would that make you happy??

And another thing: Has UAL rejected the United Center naming rights agreement? I haven''t heard. If they do, they could save a whopping $1.8 million annually for the next 11 years.

The bottom line is this: All three unions paid attorneys and other advisors (bankruptcy experts) for their opinion on whether bankruptcy was preferable to voluntary concessions. And the outside experts at all three unions said that bankruptcy was not the best route. What I don''t understand is why you disagree with them and think that Ch 11 would be better for you and your future. I just don''t get it.

Link to all stadium and arena naming rights:

http://espn.go.com/sportsbusiness/s/stadiu...ntentType=Story

Nearly every company on the list is in financial trouble or will be there shortly. In addition to AA and UAL, CO, AC, HP and DL have arenas.