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- Dec 21, 2002
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On The Cover/Top Stories
The British Are Coming!
Mark Tatge & Miriam Gottfried, 02.13.06
And so are the French, the Germans and the Dutch, to help save desperate U.S. carriers like American Airlines.
Could American Airlines soon be flying the Union Jack? It may take British Airways to rescue AMR Corp., the largest U.S. carrier, which lost $861 million on revenue of $20.7 billion in 2005 and will be marginally profitable this year, if it’s lucky.
Since 2001 AMR has lost $8.1 billion. Taking over the beleaguered airline three years ago, Chief Executive Gerard J. Arpey has gnawed costs to the bone, enlisting unions to help save $4.7 billion a year. Some expenses--like aviation fuel; crude oil was recently $68 a barrel--he can’t control. “We are not anticipating any relief in fuel prices in 2006,†says Arpey.
Still, help is on the way. U.S. and European Union regulators are warming to the idea of lifting restrictions on foreign ownership--potentially the most prodigious change since deregulation of fare pricing 28 years ago. Though foreign ownership is now capped at 25% of voting stock, the Bush Administration wants legislation to lift those barriers in order to bail out America’s troubled airlines. Takeovers might be a useful alternative to bankruptcy, where four of the six largest U.S. carriers have landed since 2001, jettisoning pension liabilities onto the federal government. Another piece of international deregulation would allow foreign airlines to fly between U.S. cities.
A British Airways-American merger would just be the beginning. Lifting restrictions on ownership and routes could bring a host of marriages (see box). Easy to see why: Traffic abroad is growing 8% a year, double the domestic growth rate, and passengers tend to be more willing to pay extra for amenities when they are crossing an ocean. European carriers, including giants like the recently combined AirFrance-KLM, want more access to U.S. markets as lucrative feeders to bigger global networks.
So why not get hitched? Arpey has tried about everything else. He vaporized American’s byzantine fare structure, eliminating Saturday night stays and cutting last-minute fares. He dumped moneylosing markets, added more seats to planes and did away with pillows and most of the free meals. To bump up sales, he started charging for curbside bag checking ($2), snacks ($3 to $5), frequent-flier upgrades ($25 to $250) and telephone and counter tickets ($10 to $15). But this added only $300 million to the top line last year.
American has been pushing abroad, in part to avoid murderous competition stateside from Southwest and JetBlue. Last year Arpey added flights to Mexico, the Caribbean, India, Japan and Ireland. Result: Revenue per seat-mile climbed 13.8% during the fourth quarter and 9.3% for the full year. International passengers now account for 35% of seat-miles, up from 29% in 2003. And there’s plenty of room to grow. “We have a lot of trend lines that are going in the right direction,†says Arpey. Asia, American’s biggest expansion area now, represents only 4% of AMR's available seat-miles.
As the second-largest carrier of international traffic after Lufthansa, BA (2005 revenue: $13.6 billion) is an ideal partner. It has access to markets in Asia, Africa and the Middle East. Many American passengers already fly the British carrier to cities AMR doesn’t service. The biggest plum (and pit) is London Heathrow Airport, where British Airways controls 40% of the traffic and shares gates with American. Once before, in 2002, U.S. and European antitrust regulators nixed BA and American plans to merge operations like ticketing and scheduling by insisting on their giving up 224 lucrative takeoff and landing slots at the London airport. Both airlines refused.
This time, however, BA’s attraction to AMR may supersede everything else. The Americas represent the Brits’ most profitable market--64% of BA’s earnings before interest and taxes, but only 37% of revenue. British Air Chief William Walsh, who worked his way up from pilot to chief executive at Aer Lingus, has made no secret of his plans for a closer alliance with American. He and Arpey reportedly met several times last year to discuss a deal. “I see Willie three or four times a year,†says Arpey. “I am not going to speculate about merging.†BA isn’t much more forthcoming. “Getting the law changed is our first priority,†says a spokesman there, adding that if the company goes shopping, it will shoot for the moon, not just 25% of the voting shares.
That’s only a slight sticking point. Even if the voting rules don’t change, the U.S. Department of Transportation will likely allow carriers like British Airways to gain management control. That would permit a sensible combination of marketing, scheduling, fares, fleets and baggage handling without fears of antitrust reprisal. Under that scenario the carriers would keep separate boards of directors and report operating results as two distinct companies. The changed rules might also lure foreign carriers to selected assets of Delta or Northwest, which remain in bankruptcy.
One other hitch. AMR may have escaped Chapter 11. But it's hardly in great shape, what with debt of $20 billion, $2 billion or so in annual debt service and negative equity of $1.3 billion. Citigroup analyst Andrew Light says it would cost $4 billion to recapitalize AMR's balance sheet. It also needs to spend $1.5 billion per year to replace its aging fleet. On the plus side, American has $4.3 billion in cash and a market cap of only $3.1 billion. Let the nuptials begin.
The British Are Coming!
Mark Tatge & Miriam Gottfried, 02.13.06
And so are the French, the Germans and the Dutch, to help save desperate U.S. carriers like American Airlines.
Could American Airlines soon be flying the Union Jack? It may take British Airways to rescue AMR Corp., the largest U.S. carrier, which lost $861 million on revenue of $20.7 billion in 2005 and will be marginally profitable this year, if it’s lucky.
Since 2001 AMR has lost $8.1 billion. Taking over the beleaguered airline three years ago, Chief Executive Gerard J. Arpey has gnawed costs to the bone, enlisting unions to help save $4.7 billion a year. Some expenses--like aviation fuel; crude oil was recently $68 a barrel--he can’t control. “We are not anticipating any relief in fuel prices in 2006,†says Arpey.
Still, help is on the way. U.S. and European Union regulators are warming to the idea of lifting restrictions on foreign ownership--potentially the most prodigious change since deregulation of fare pricing 28 years ago. Though foreign ownership is now capped at 25% of voting stock, the Bush Administration wants legislation to lift those barriers in order to bail out America’s troubled airlines. Takeovers might be a useful alternative to bankruptcy, where four of the six largest U.S. carriers have landed since 2001, jettisoning pension liabilities onto the federal government. Another piece of international deregulation would allow foreign airlines to fly between U.S. cities.
A British Airways-American merger would just be the beginning. Lifting restrictions on ownership and routes could bring a host of marriages (see box). Easy to see why: Traffic abroad is growing 8% a year, double the domestic growth rate, and passengers tend to be more willing to pay extra for amenities when they are crossing an ocean. European carriers, including giants like the recently combined AirFrance-KLM, want more access to U.S. markets as lucrative feeders to bigger global networks.
So why not get hitched? Arpey has tried about everything else. He vaporized American’s byzantine fare structure, eliminating Saturday night stays and cutting last-minute fares. He dumped moneylosing markets, added more seats to planes and did away with pillows and most of the free meals. To bump up sales, he started charging for curbside bag checking ($2), snacks ($3 to $5), frequent-flier upgrades ($25 to $250) and telephone and counter tickets ($10 to $15). But this added only $300 million to the top line last year.
American has been pushing abroad, in part to avoid murderous competition stateside from Southwest and JetBlue. Last year Arpey added flights to Mexico, the Caribbean, India, Japan and Ireland. Result: Revenue per seat-mile climbed 13.8% during the fourth quarter and 9.3% for the full year. International passengers now account for 35% of seat-miles, up from 29% in 2003. And there’s plenty of room to grow. “We have a lot of trend lines that are going in the right direction,†says Arpey. Asia, American’s biggest expansion area now, represents only 4% of AMR's available seat-miles.
As the second-largest carrier of international traffic after Lufthansa, BA (2005 revenue: $13.6 billion) is an ideal partner. It has access to markets in Asia, Africa and the Middle East. Many American passengers already fly the British carrier to cities AMR doesn’t service. The biggest plum (and pit) is London Heathrow Airport, where British Airways controls 40% of the traffic and shares gates with American. Once before, in 2002, U.S. and European antitrust regulators nixed BA and American plans to merge operations like ticketing and scheduling by insisting on their giving up 224 lucrative takeoff and landing slots at the London airport. Both airlines refused.
This time, however, BA’s attraction to AMR may supersede everything else. The Americas represent the Brits’ most profitable market--64% of BA’s earnings before interest and taxes, but only 37% of revenue. British Air Chief William Walsh, who worked his way up from pilot to chief executive at Aer Lingus, has made no secret of his plans for a closer alliance with American. He and Arpey reportedly met several times last year to discuss a deal. “I see Willie three or four times a year,†says Arpey. “I am not going to speculate about merging.†BA isn’t much more forthcoming. “Getting the law changed is our first priority,†says a spokesman there, adding that if the company goes shopping, it will shoot for the moon, not just 25% of the voting shares.
That’s only a slight sticking point. Even if the voting rules don’t change, the U.S. Department of Transportation will likely allow carriers like British Airways to gain management control. That would permit a sensible combination of marketing, scheduling, fares, fleets and baggage handling without fears of antitrust reprisal. Under that scenario the carriers would keep separate boards of directors and report operating results as two distinct companies. The changed rules might also lure foreign carriers to selected assets of Delta or Northwest, which remain in bankruptcy.
One other hitch. AMR may have escaped Chapter 11. But it's hardly in great shape, what with debt of $20 billion, $2 billion or so in annual debt service and negative equity of $1.3 billion. Citigroup analyst Andrew Light says it would cost $4 billion to recapitalize AMR's balance sheet. It also needs to spend $1.5 billion per year to replace its aging fleet. On the plus side, American has $4.3 billion in cash and a market cap of only $3.1 billion. Let the nuptials begin.
