Analyst Jamie Baker says AA won't cut labor costs as much as Horton would like

[BoeingBoy]

You brought DL into this discussion. Second thoughts? I initially said nothing about pension liabilities. Here's what I said - "The available info says that average employee pay isn't out of line - just slightly above the average for the network carriers. But average pension/benefit cost was nearly $5000/year per employee above the next highest carrier and nearly $6000/year/employee above the average (which includes AA) in 2010. The DB pension plans are obviously a large cost that none of the competition has."

Note the average pension/benefit cost mentioned - did I break that down to pension cost vs benefit cost? I did say that the DB plans are a large cost (note - nothing about liability), which they are - all else being equal (which it isn't in the case of DL) an on-going DB plan will be more costly than a frozen DB plan which will be more costly than a DC plan. Again, note that I said nothing about liability. And as I said, AA is the only carrier that currently has it's full complement of on-going DB plans. Does DL? UA? US?

Tell me this, oh Mr "The Whole Truth" - are ongoing DB pension plans a bigger cost year after year than a frozen DB plan (all else being equal)? If not, why did every other network carrier at least freeze, if not terminate, their DB plans? You claim I'm wrong, so answer those questions.

I never said that AA employees "must" have their DB plans frozen or terminated, but I would be surprised if AA didn't follow the path of the other network carriers while it's in bankruptcy. After all, the mighty DL did it so it can't be wrong...

Quit putting words in my mouth that I didn't say.

Jim

 

[WorldTraveler]

You brought DL into this discussion. Second thoughts? I initially said nothing about pension liabilities. Here's what I said - "The available info says that average employee pay isn't out of line - just slightly above the average for the network carriers. But average pension/benefit cost was nearly $5000/year per employee above the next highest carrier and nearly $6000/year/employee above the average (which includes AA) in 2010. The DB pension plans are obviously a large cost that none of the competition has."

Note the average pension/benefit cost mentioned - did I break that down to pension cost vs benefit cost? I did say that the DB plans are a large cost (note - nothing about liability), which they are - all else being equal (which it isn't in the case of DL) an on-going DB plan will be more costly than a frozen DB plan which will be more costly than a DC plan. Again, note that I said nothing about liability. And as I said, AA is the only carrier that currently has it's full complement of on-going DB plans. Does DL? UA? US?

Tell me this, oh Mr "The Whole Truth" - are ongoing DB pension plans a bigger cost year after year than a frozen DB plan (all else being equal)? If not, why did every other network carrier at least freeze, if not terminate, their DB plans? You claim I'm wrong, so answer those questions.

I never said that AA employees "must" have their DB plans frozen or terminated, but I would be surprised if AA didn't follow the path of the other network carriers while it's in bankruptcy. After all, the mighty DL did it so it can't be wrong...

Quit putting words in my mouth that I didn't say.

Jim

I didn't say that you said that AA employees must have their DB plans frozen or terminated... but that is the mindset that virtually everyone seems to think - and the basis for the argument is that other airlines managed to terminate their pension plans in BK or at the minimum reduce their costs.
And that is where I say the numbers just don't add up. DL has larger pension costs TODAY per employee than it had before BK and they also are contributing to their DC plans AND they gave the PBGC and the pilots several billion dollars in equity in the new company to settle the pilot pension plan. UA and US both gave the PBGC signficant amounts of equity in order to terminate their plans.
While conventional wisdom is that pension costs will be lower using a DC plan, the cost of terminating a plan is enormous and it takes a very long time to see the benefit in reduced pension costs... and that is exactly the way the PBGC wants it - fight aggressively for equity in the new company which competes with the creditors in hopes that it will force the company to keep its pension plans - or at least freeze rather than terminate since a freeze makes little to no claim to the creditors. The reason pensions was terminated or frozen at other carriers is because the creditors want predictability -and AMR will not emerge without addressing its pension problem.... but I still believe the odds are that they will freeze, not terminate, because the claims by the PBGC and the employees against the estate will be very large - and will offset what the creditors can get. But pension costs must be brought under control.
You can't talk about the cost of a pension plan without talking about the unfunded liability - because that is exactly what the creditors are concerned about. They want to minimize the uncertainty of the future business plan - and DC plans are more predictable when it comes to costs - but they also do not want claims to be made against the estate. Thus, a freeze is the least onerous cost to the creditors while bringing predictability to a company's pension costs. But there are still enormous liabilities and costs remaining on the books for the reorganized company - and it is precisely because far too many think that ALL BK airlines have walked away from their DB pensions that I spoke up and will continue to do so - because it is not accurate but it also paints the picture that the only way out of the pension problems is to dump the pension plans - which is also clearly not accurate.
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BTW, lest anyone think this is an airline specific thing, they might want to look at the US Postal Service which is going through the same problem... slow growing or shrinking companies cannot sustain the costs that DB pension plans present... as with Social Security, you must grow the pie at a fairly stable pace to ensure there is money to pay future claims... throw in bad market conditions and the cost can quickly become unmanageable.

 

[dfw gen]

the expert has spoken again...... world traveler please lend your expert advise to someone that gives a #### what you think.

 

[BoeingBoy]

WT,

You're all over the place as well as stating inaccuracies. Frankly I've had enough of your bs. If you ever decide to be consistent and accurate maybe we can discuss some of the issues.

Jim

 

[eolesen]

Pass the popcorn...

Merry Christmas, guys. Hope you all have a good couple days off with those who matter most to you.

 

[FWAAA]

Whose pay is causing the labor differential of $800 million?

I'm going to partially agree and partially disagree with BoeingBoy on this issue. Productivity/work rules and the pension and medical no doubt account for some of the difference, but some AA workgroups still have much higher hourly rates than the competition, particularly pilots and FAs. AA's pilots make more per hour (and have made more per hour) than any other legacy pilots other than WN and recently, Delta (as DL's post-bankruptcy raises have surpassed AA's pilot rates. Add in the productivity issues and AA's pilots are more expensive than DL or UA/CO or US (by a substantial margin - US pilots work for slave wages compared to AA's pay rates). Flight attendants: AA's hourly rates are the highest except for WN and CO. AA's FA rates are substantially higher than US and higher than DL or UA/CO. Add in the productivity issues and there's a large part of the labor cost disadvantage.

And maintenance? As much as Bob Owens desperately wants to convince everyone that TULE and DWH and AFW and their blended rates (A&P plus lower paid helpers (OSMs, etc) are cheaper overall than outsourced maintenance, AA's overall maintenance costs per ASM are substantially higher than any other airline. DOT numbers have shown as much for many years. Fleet is probably similarly higher-priced given less outsourcing than many other airlines.

No one workgroup is responsible for the $800 million, but each drop contributes to a mighty flood.

For some perspective, Virgin America just released its Q3 numbers this week, and its labor costs are exactly one-third of its fuel costs for the first nine months of 2011. AMR's labor costs for the first nine months were 83.5% of its fuel costs (compared to just 33% at VX). AMR's labor costs were 29.2% of revenues so far this year while at VX, labor costs were just 13.3% of revenues for the first nine months. AMR won't lower its labor costs to anything near VX, but it's eye opening to see just how cheaply some young airline-enthusiasts will work. Face it: Some people would pay the airline for the privilege of working for an airline. As an aside, despite slave-labor wage levels at VX, it's the only airline bleeding money at AMR's pace for the first nine months of 2011.

http://www.virginamerica.com/press-release/2011/virgin-america-reports-third-quarter-2011-financial-results.html

There are a lot of reasons that AMR has higher labor costs than any of its competitors (despite not always having the highest wage rates).

 

[Buck]

I'm going to partially agree and partially disagree with BoeingBoy on this issue. Productivity/work rules and the pension and medical no doubt account for some of the difference, but some AA workgroups still have much higher hourly rates than the competition, particularly pilots and FAs. AA's pilots make more per hour (and have made more per hour) than any other legacy pilots other than WN and recently, Delta (as DL's post-bankruptcy raises have surpassed AA's pilot rates. Add in the productivity issues and AA's pilots are more expensive than DL or UA/CO or US (by a substantial margin - US pilots work for slave wages compared to AA's pay rates). Flight attendants: AA's hourly rates are the highest except for WN and CO. AA's FA rates are substantially higher than US and higher than DL or UA/CO. Add in the productivity issues and there's a large part of the labor cost disadvantage.

And maintenance? As much as Bob Owens desperately wants to convince everyone that TULE and DWH and AFW and their blended rates (A&P plus lower paid helpers (OSMs, etc) are cheaper overall than outsourced maintenance, AA's overall maintenance costs per ASM are substantially higher than any other airline. DOT numbers have shown as much for many years. Fleet is probably similarly higher-priced given less outsourcing than many other airlines.

No one workgroup is responsible for the $800 million, but each drop contributes to a mighty flood.

For some perspective, Virgin America just released its Q3 numbers this week, and its labor costs are exactly one-third of its fuel costs for the first nine months of 2011. AMR's labor costs for the first nine months were 83.5% of its fuel costs (compared to just 33% at VX). AMR's labor costs were 29.2% of revenues so far this year while at VX, labor costs were just 13.3% of revenues for the first nine months. AMR won't lower its labor costs to anything near VX, but it's eye opening to see just how cheaply some young airline-enthusiasts will work. Face it: Some people would pay the airline for the privilege of working for an airline. As an aside, despite slave-labor wage levels at VX, it's the only airline bleeding money at AMR's pace for the first nine months of 2011.

http://www.virginamerica.com/press-release/2011/virgin-america-reports-third-quarter-2011-financial-results.html

There are a lot of reasons that AMR has higher labor costs than any of its competitors (despite not always having the highest wage rates).

Yet for everything you have said, the maintenance compensation is lower than most of the industry. I am not insinuating that anyone is to blame, just looking for economic understanding. I realize that there is a lot more to compensation and cost than an hourly rate.

 

[WorldTraveler]

WT,

You're all over the place as well as stating inaccuracies. Frankly I've had enough of your bs. If you ever decide to be consistent and accurate maybe we can discuss some of the issues.

Jim

let me rephrase for you, Jim.
"I'm tired of having my errors pointed out to me."

Let me emphatically note that this is the phrase you made that is WRONG.. FLAT OUT WRONG.

The DB pension plans are obviously a large cost that none of the competition has.

All you had to do was admit you made an incorrect statement and move on but you have tried every manner of tap-dancing instead of doing the noble thing which would be to admit you had something wrong.
If you don't want people pointing out your errors, then don't post items which are clearly factually black or white on an open forum.
And if you do, just either be principled enough to admit you are wrong or else walk away from the conversation.
It's a principle that applies to you and anyone else.
.
The simple fact is that BK is a powerful tool but you can't wipe away alot of the legacy costs, which is the whole essence of the article we are discussing on this thread.
When you add in that the BK laws do not really allow you to dump pension obligations w/o paying a fairly high price (equity in the new company) and it isn't hard to see why DL and NW fought for and move the right to freeze their pensions so that their creditors had manageable and known pension costs instead of the unknown, unpredictable costs that are part of a DB plan.
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The poster child for a productivity turnaround, BTW, is UA. If you go back to the late 90s, you will see that AA and UA had very similar numbers of employees for the size of their operations - and far higher numbers of employees than CO, DL, and NW. What has turned UA around is that they have increased productivity enormously while benefitting from travel growth in mainland China.
What you and others absolutely cannot stand is that DL has shown the flexibility to avoid putting its employees through another round of cuts by adapting to the market and finding new sources of revenue.
Some of the people who are participating in this conversation were some of the first to mock DL's drastic winter cuts... yet the news is now full of stories about problems in Europe.
DL fought for 2 years to win the slot deal in a clear effort to shift some of the highest value revenue in the US away from its competitors.
Those are the types of things well run businesses do.... pull out of markets and reduce exposure where it doesn't make sense and then redeploy resources elsewhere.
In the dysfunctional airline business where mgmt usually is two steps behind the market, DL is doing well because it is adapting - and it makes the bar even higher for DL's competitors.
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And it also says that the network carrier notion that employees cannot participate in the recovery in rebuilding of the company is flat out wrong.
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And there are a whole lot of people at AA who have conditioned themselves that they will be screwed in BK... and they very well may.
But BK can't fix AA's revenue problem, one which I have been pointing out for a year as growing larger and larger. And as other more nimble competitors go after AA's revenue it will get worse.
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The airline industry is intensely competitive. If you want to be a part of it and talk about the business of aviation, then recognize that there are people who are and will do the job right. For now, it's DL and other low fare carriers. In five years, it might be someone else. But you can be sure that there will be carriers who will figure out how to win against others who don't or won't recognize their environment.
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Yes, VX represents the class of carriers who have no one drawing pensions, young employees who have much fewer health problems, and young airplanes.
You can either roll over and let that new class of airlines win or you can figure out how to compete and win against them. And the legacy carriers that win against low fare carriers do so by religiously protecting their key markets even against low fare carrier incursions and by creating revenues elsewhere that are not subject to low fare carrier incursions.
For years, US mgmt rolled over to one carrier or another in its key markets and now US employees hear all the time from mgmt that the company cannot compete for revenue with other network carriers.
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If AA is to win in BK, it must fix its revenue AND its cost problem - but they must live with the core structure (costs, revenues) of the company that exists now and will remain even after BK because you can only accomplish so much in BK- unless the creditors decide it is not worth restructuring the company or unless some other company chooses to buy AA out and do the nasty work of restructuring the company.

 

[BoeingBoy]

DL 2011 estimated DB pension expense ~$300 million
AA 2011 estimated DB pension expense ~$670 million (pre-bankruptcy)

BTW, AA's estimated cost for health care in 2011 is about 1/3 of the DB pension cost pre-bankruptcy.

Jim

 

[WorldTraveler]

From AMR's 2010 annual report filed on 2/16/11 here

http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-sec&control_selectgroup=Annual%20Filings

on page 32:

"Pension Obligations The Company is required to make minimum contributions to its defined benefit pension plans under the
minimum funding requirements of the Employee Retirement Income Security Act (ERISA), the Pension Funding Equity Act of 2004, the
Pension Protection Act of 2006, and the Pension Relief Act of 2010. The Company estimates its 2011 required contribution to its defined
benefit pension plans to be approximately $520 million under the provisions of these acts.
The Company's obligation for pension and retiree medical and other benefits increased from $7.4 billion at December 31, 2009 to
$7.9 billion at December 31, 2010, largely the result of a lower discount rate associated with declining interest rates in the bond markets in 2010. A significant portion of this increase is recorded in Accumulated other comprehensive loss, a component of stockholders' equity."

From Delta Air Lines' 2010 annual report filed on the same date here
http://images.delta.com.edgesuite.net/delta/pdfs/annual_reports/2010_10K.pdf
on page 13

"The recent financial crisis and economic downturn resulted in broadly lower investment asset returns and values, including in the defined benefit pension plans that we sponsor for eligible employees and retirees. As of December 31, 2010, the defined benefit pension plans had an estimated benefit obligation of approximately $17.5 billion and were funded through assets with a value of approximately $8.2 billion. The benefit obligation is significantly affected by investment asset returns and changes in interest rates, neither of which is in the control of Delta.
We estimate that our funding requirement for our defined benefit pension plans, which are governed by ERISA and have been frozen for future accruals, is approximately $600 million in 2011. The significant level of required funding is due primarily to the decline in the investment markets in 2008, which negatively affected the value of our pension assets. Estimates of pension plan funding requirements can vary materially from actual funding requirements because the estimates are based on various assumptions concerning factors outside our control, including, among other things, the market performance of assets; statutory requirements; and demographic data for participants, including the number of participants and the rate of participant attrition. Results that vary significantly from our assumptions could have a material impact on our future funding obligations."

If you have actual funding numbers for 2011 (which has not closed), please post them w/ a source.

But regardless of the amount, it still remains that AA is NOT the only network airline or competitor to AA/AMR that has DB pension obligations - not only still on the books but which each year require funding.
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The PBGC will vigorously argue that it is indeed possible for network airlines to be profitable with frozen but not terminated pension plans.

 

[BoeingBoy]

Oops, a typo. That "6" in AMR's should be a "5"...

No, don't have actual numbers since the year isn't over plus AMR's bankruptcy filing may have resulted in them not making anticipated payments to some of the plans. In US' second bankruptcy, the trigger for filing was an upcoming payment to the FA's DB plan - US didn't have the money to make that payment and meet loan covenants. So US filed and didn't make the pension plan payment.

DL 2011 estimated DB pension expense ~$300 million (Statement on page 39 of 10-K)
AA 2011 estimated DB pension expense ~$570 million (pre-bankruptcy) (chart on page 81 of 10-K)

The difference is that you talk about the payments that each is expecting to be obligated to make and I gave the estimated costs that would be incurred. AMR has been paying more than required, so has higher expenses than obligated to incur. Also, DL makes rosier assumptions about ROI than AMR, resulting in smaller payments required for the same pension liability but DL has a much higher liability so I can only assume (not state as fact) that DL is allowed to extend it's payment out further since their plans are frozen. DL's (including NW's) DB pensions must have been woefully underfunded since the total liability is so out of line with AMR's (over double) even considering the number of employees of each and that DL's plans have been frozen for a couple of years or more I think while AMR's are still technically ongoing.

I take it you noticed the "BTW" on retiree health care which you said was a lot bigger problem than the DB pensions. I'm amazed that the outstanding liability could be so much less (roughly 1/3) for retiree health care yet it would be such a bigger problem...

Frankly, I don't care how much DL pays into it's frozen pension plans - it could be a billion quadzillion dollars for all I care. This is the AA forum and we're discussing what may/may not happen that affects the AMR employees. It was you that made it an AMR vs oh so great DL discussion...

Jim

 

[WorldTraveler]

Oops, a typo. That "6" in AMR's should be a "5"...

No, don't have actual numbers since the year isn't over plus AMR's bankruptcy filing may have resulted in them not making anticipated payments to some of the plans. In US' second bankruptcy, the trigger for filing was an upcoming payment to the FA's DB plan - US didn't have the money to make that payment and meet loan covenants. So US filed and didn't make the pension plan payment.

DL 2011 estimated DB pension expense ~$300 million (Statement on page 39 of 10-K)
AA 2011 estimated DB pension expense ~$570 million (pre-bankruptcy) (chart on page 81 of 10-K)

The difference is that you talk about the payments that each is expecting to be obligated to make and I gave the estimated costs that would be incurred. AMR has been paying more than required, so has higher expenses than obligated to incur. Also, DL makes rosier assumptions about ROI than AMR, resulting in smaller payments required for the same pension liability but DL has a much higher liability so I can only assume (not state as fact) that DL is allowed to extend it's payment out further since their plans are frozen. DL's (including NW's) DB pensions must have been woefully underfunded since the total liability is so out of line with AMR's (over double) even considering the number of employees of each and that DL's plans have been frozen for a couple of years or more I think while AMR's are still technically ongoing.

I take it you noticed the "BTW" on retiree health care which you said was a lot bigger problem than the DB pensions. I'm amazed that the outstanding liability could be so much less (roughly 1/3) for retiree health care yet it would be such a bigger problem...

Frankly, I don't care how much DL pays into it's frozen pension plans - it could be a billion quadzillion dollars for all I care. This is the AA forum and we're discussing what may/may not happen that affects the AMR employees. It was you that made it an AMR vs oh so great DL discussion...

Jim

no problems on the typo.
once again, Jim, the reason we are even discussing this is because you made the statement that AA has expenses that other carriers do not... not only does your own data show that to not be true but so does the data I provided.
The sole reason I bring up DL is because DL's plans are less well-funded and DL is also paying more CASH into those plans.
And that is the essence of the discussion. The creditors don't really care what the plans pay out... they care what the plans cost the company in CASH that has to be contributed in order to meet the minimum funding requirements.
DL and NW did not pay into their plans while they were in BK - and it is expected AMR will not as well.. thus, their underfunding will worsen over the next 18-24 months while they work their way through the process.
AMR's pension cash costs are related to them having operating plans which are still continuing to accrue benefits. DL's plans are only paying out benefits which have been accrued - and stopped accruing years ago.
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I did not miss your comment at all about retiree health care costs - I didn't comment because I think we are on the same page. that those costs can be eliminated... they are a promise, which quite frankly CAN be broken. Health care costs continue to increase in the US and companies left and right are cutting benefits and raising premiums - at the very time the government thinks it has a solution.
Of course people don't use health care services at the same rate that they receive pension benefits and so the actual number is smaller but the increase in costs, the lack of insight as to a solution, and the ability of companies to pretty easily terminate those benefits make health care costs a a far bigger priority - and we saw that even in the tentative pre-BK agreements between the TWU and some employee groups. It should be no surprise that the company will aggressively move now to terminate and limit those benefits and they will derive far bigger savings than from pension changes - just like AA's network competitors did.
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The reason for discussing pension funding and other benefit costs for DL, NW, and CO (now under the responsibility of UA) is to gain some insight into what will happen for AA employees - retiree medical is a goner but there is every reason to think that the company can keep their DB plans, although on a frozen basis.
By freezing their plans, the creditors will know the obligations will have for those plans in the future and further increases in DB costs will be eliminated... while at the same time, DC costs can be calculated with a fair degree of accuracy.
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I wish you and yours well this Christmas and holiday season - and most importantly I think we can agree that we want AA employees to fare better than their peers who have gone before them in BK... but the way that will happen is if AA mgmt puts a priority on minimizing cuts to employees, restoring whatever cuts are made as quickly as possible, generating industry top line revenues, and taking a step forward in building a collaborative workplace - something that hasn't existed at AA in a very long time.

 

[TWU informer]

Why do you figure AA refuses to diclose the amount that was being paid on the leases on aircraft in the desert?

And you wonder why we fail to trust even those filing that you two argue with.....pfftttt

Having arguements over those public filings would be like argueing now that there really wasn't a million dollar mansion in the UK.
Where is the cost of upkeep on that place in those public filings? Where is the cost of the leases? Where is the breakdown of labor cost by work group and management.

 

[BoeingBoy]

no problems on the typo.
once again, Jim, the reason we are even discussing this is because you made the statement that AA has expenses that other carriers do not..

Tell us all which other network carrier has the expense of ongoing DB pension plans then. That is an expense that AA has - funding ongoing plans - and I know of no other network carrier that does. You yourself have agreed that ongoing plans are more expensive long-term than frozen plans, so which other network carriers have ongoing plans?

Instead you talk about how much liability DL has from it's frozen plans. Maybe it and NW should have funded them better before they were frozen, I don't know but they're not ongoing plans. You talk about most anything except the fact that AA is the only network carrier with ongoing DB plans with the current and future as far as the eye can see task of funding them.

Jim

 

[BoeingBoy]

Why do you figure AA refuses to diclose the amount that was being paid on the leases on aircraft in the desert?

Same reason no airline discloses what they pay for a new airplane - don't want to disclose anything that might let a competitor get a better deal.

Jim